Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2010 -- 2011
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
SENATE
CORPORATIONS AMENDMENT (IMPROVING ACCOUNTABILITY ON
DIRECTOR AND EXECUTIVE REMUNERATION) BILL 2011
REVISED EXPLANATORY MEMORANDUM
THIS EXPLANATORY MEMORANDUM TAKES ACCOUNT OF
AMENDMENTS MADE BY THE HOUSE OF REPRESENTATIVES TO THE BILL
AS INTRODUCED
(Circulated by the authority of the
Parliamentary Secretary to the Treasurer, the Hon David Bradbury MP)
Table of contents
Glossary .................................................................................................. 1
General outline and financial impact ....................................................... 3
Chapter 1 Strengthening the non-binding vote -- the
`two-strikes' test ............................................................ 5
Chapter 2 Improving accountability on the use of
remuneration consultants............................................ 11
Chapter 3 Prohibiting KMP from voting on remuneration
matters ........................................................................ 17
Chapter 4 Prohibiting hedging of incentive remuneration ............. 21
Chapter 5 No vacancy rule ........................................................... 25
Chapter 6 Cherry picking .............................................................. 29
Chapter 7 Persons required to be named in the
remuneration report .................................................... 33
Chapter 8 Regulation impact statement ....................................... 35
Index ..................................................................................................... 79
iii
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
AGM Annual General Meeting
APRA Australian Prudential Regulation Authority
ASIC Australian Securities and Investments
Commission
ASX Australian Securities Exchange
CEO Chief Executive Officer
Corporations Act Corporations Act 2001
KMP Key Management Personnel
PC Productivity Commission
RIS Regulation Impact Statement
1
General outline and financial impact
General outline
The Bill contains a range of measures to strengthen Australia's
remuneration framework. It implements many of the recommendations
made by the Productivity Commission (PC) in its recent inquiry into
executive remuneration in Australia.
The Bill contains measures to empower shareholders to hold directors
accountable for their decisions on executive remuneration, to address
conflicts of interest in the remuneration setting process, and to increase
transparency and accountability in executive remuneration matters.
The key measures include:
· strengthening the non-binding vote on the remuneration
report, by requiring a vote for directors to stand for
re-election if they do not adequately address shareholder
concerns on remuneration issues over two consecutive years;
· increasing transparency and accountability with respect to the
use of remuneration consultants;
· addressing conflicts of interests that exist with directors and
executives voting their shares on remuneration resolutions;
· ensuring that remuneration remains linked to performance by
prohibiting hedging of incentive remuneration;
· requiring shareholder approval for declarations of `no
vacancy' at an annual general meeting (AGM);
· prohibiting proxy holders from `cherry picking' the proxies
they exercise, by requiring that any directed proxies that are
not voted default to the Chair, who is required to vote the
proxies as directed; and
· reducing the complexity of the remuneration report by
confining disclosures in the report to the key management
personnel (KMP).
Date of effect: 1 July 2011 for most measures.
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Corporations Amendment (Improving Accountability on Director and Executive Remuneration)
Bill 2011
Summary of regulation impact statement
Regulation impact on business
Impact: A Regulation Impact Statement (RIS) has been prepared in
accordance with the Government's best practice regulation requirements.
4
Chapter 1
Strengthening the non-binding vote -- the
`two-strikes' test
Context of amendments
1.1 The Corporations Act 2001 (Corporations Act) requires a listed
company to put its remuneration report to a non-binding shareholder vote
at the AGM.
1.2 Many submissions to the PC inquiry noted that the introduction
of the non-binding vote fostered more productive engagement between
shareholders and boards on remuneration issues. Evidence suggests that
some boards are responsive to the non-binding vote, and that the
opportunity for shareholders to put forward their views is having a
positive impact on remuneration polices.
1.3 However, there are cases where boards have not been responsive
to shareholder concerns. The Corporations Act currently does not set out
any requirements where a board proceeds with its remuneration proposals
despite a negative shareholder vote.
1.4 Currently, if shareholders are dissatisfied, they have the power
to vote to remove a director, although this could be a somewhat extreme
response if the board is not given a chance to respond to concerns. This is
particularly the case if the directors are generally having a positive impact
on the value of the company.
1.5 This has prompted suggestions that the Corporations Act be
amended to strengthen the non-binding vote. However, it is not
considered ideal to make the shareholder vote on remuneration binding.
1.6 The PC inquiry concluded that there would be significant
practical difficulties and risks associated with introducing a binding vote.
If a binding vote was introduced, companies would not be able to finalise
a contract with an executive until shareholder approval was obtained.
This would be likely to create considerable uncertainty and delay,
particularly if a company is looking to quickly secure a top executive. In
addition, a binding vote could be disruptive to the operation of a company.
It could result in a deadlock arising between shareholders and the board
regarding the appropriate levels of executive remuneration.
1.7 The introduction of a binding vote for shareholders would also
represent a fundamental change to the role of directors and would impact
on their capacity to manage the company. A binding vote would absolve
directors of their responsibility to shareholders on this issue, and would
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Corporations Amendment (Improving Accountability on Director and Executive Remuneration)
Bill 2011
undermine their capacity to make key decisions affecting the performance
of the company. It could also affect the competitiveness of Australian
companies and their ability to attract and retain top executives.
Summary of new law
1.8 Under the new law, a `two-strikes and re-election' process will
be introduced in relation to the non-binding shareholder vote on the
remuneration report.
1.9 The `first strike' will occur where a company's remuneration
report receives a `no' vote of 25 per cent or more. Where this occurs, the
company's subsequent remuneration report must include an explanation of
the board's proposed action in response to the `no' vote or an explanation
of why no action has been taken.
1.10 The `second strike' occurs where a company's subsequent
remuneration report receives a `no' vote of 25 per cent or more. Where
this occurs, shareholders will vote at the same AGM to determine whether
the directors will need to stand for re-election. If this spill resolution
passes with 50 per cent or more of eligible votes cast, then the `spill
meeting' will take place within 90 days. A company will still need to
provide the minimum notice period for holding a meeting, as required by
the Corporations Act. A company will also need to comply with any
minimum notice period set out in its constitution for the nomination of
candidates for the board. This will ensure that shareholder nominated
candidates can seek endorsement at the spill meeting.
1.11 This reform is intended to provide an additional level of
accountability for directors and increased transparency for shareholders.
Where a company receives significant `no' votes on its remuneration
report over two consecutive years, and has not adequately addressed
concerns raised by shareholders, it is appropriate for the board to be held
accountable through the re-election process.
1.12 This reform strengthens the non-binding vote and maintains the
fundamental principle underlying Australia's corporate governance
framework that directors are responsible for, and accountable to,
shareholders on all aspects of the management of the company, including
the amount and composition of executive remuneration.
6
The `two-strikes' test
Comparison of key features of new law and current law
New law Current law
A `two-strikes and re-election' The Corporations Act does not set out
process will be introduced where a any consequences where a board
company faces significant `no' votes proceeds with its remuneration
on its remuneration report over two policies despite a negative
consecutive years. shareholder vote.
Detailed explanation of new law
1.13 Under the new law, a `two-strikes and re-election' process will
be introduced, as set out below:
· where a company's remuneration report receives a `no' vote
of 25 per cent or more, the company's subsequent
remuneration report must explain the board's proposed action
in response or, if the board does not propose any action, the
board's reasons for inaction [Schedule 1, Item 19,
paragraph300A(1)(g)]; and
· where the company's subsequent remuneration report
receives a `no' vote of 25 per cent or more, a resolution must
be put (known as the `spill resolution') to shareholders at the
same AGM. Notice of the spill resolution must be contained
in the meeting papers for the AGM to ensure that notice has
been given in the event that the second strike is triggered.
The notice must explain the circumstances in which the
resolution will apply. [Schedule 1, Item 9, subsection 249L(2)]
· If the spill resolution passes with 50 per cent or more of the
eligible votes cast, another meeting of the company's
shareholders (known as the `spill meeting') must be held
within 90 days [Schedule 1, Item 13, section 250V]. A company
will still need to provide the minimum notice period for
holding a meeting, as required by the Corporations Act. A
company will also need to comply with any minimum notice
period set out in its constitution for the nomination of
candidates for the board. This will ensure that shareholder
nominated candidates can seek endorsement at the spill
meeting [Schedule 1, Item 13, section 250W].
1.14 The separation of the `second strike' and the `spill resolution' is
intended to ensure that shareholders are not discouraged from voting
against the remuneration report, because they fear removal of certain
board members. It ensures that shareholders are free to express their
concerns on the remuneration report, and is intended to provide a clearer
signal of shareholders' views on the remuneration report.
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Bill 2011
1.15 At the spill meeting, those individuals who were directors when
the directors' report was considered at the most recent AGM will be
required to stand for re-election (other than the managing director, who is
permitted to hold office indefinitely without being re-elected to the office,
pursuant to the Australian Securities Exchange (ASX) listing rules)
[Schedule 1, Item 13, subsection 250V(1)]. These directors will cease to hold
office immediately before the end of the spill meeting. Any new directors
elected at the spill meeting automatically hold office at the end of the
meeting [Schedule 1, Item 13, subsections 250W(4) and (9)].
1.16 In the case where none of the individuals who were directors
when the directors' report was considered at the most recent AGM remain
as directors of the company, then the company will not be required to hold
the spill meeting. This is the case whether or not those directors have
been replaced by new directors.
1.17 A company must hold the spill meeting within 90 days after the
spill resolution is passed. However, this deadline does not mean that the
timeframes for giving notice of the meeting or of resolutions to appoint
directors can be disregarded [Schedule 1, Item 13, subsections 250W(2) and (3)].
When scheduling a spill meeting, a company must not disregard minimum
notice periods contained in the Corporations Act or those contained in the
company's constitution for shareholders to put forward nominated
candidates. This will ensure that shareholder nominated candidates can
seek endorsement at the spill meeting.
1.18 If the company fails to hold the spill meeting within 90 days of
the spill resolution being passed, each person who is a director of the
company at the end of those 90 days commits an offence [Schedule 1,
Item 13, subsection 250W(5)]. Section 249CA of the Corporations Act
empowers any director of a listed company to call a meeting of the
company's members, and as such, any director could ensure that the spill
meeting is held within the 90 days.
1.19 However, this offence does not extend to a director appointed at
a point in time that would not allow the requisite amount of notice for the
meeting to be given under existing section 249HA. [Schedule 1, Item 13,
subsections 250W(5) and (8)]
1.20 A failure to hold the spill meeting within 90 days of the spill
resolution being passed is a strict liability offence, as a failure to hold a
spill meeting would be considered a serious breach of the requirements,
particularly as it diminishes the ability of shareholders to hold directors
accountable on remuneration issues. [Schedule 1, Item 13, subsection 250W(6)]
1.21 The Bill provides a mechanism that is intended to ensure that a
minimum of three directors remain after the spill meeting, as required by
existing section 201A(2) of the Corporations Act. As the managing
director is not required to stand for re-election, at least one director of the
company should remain following the spill meeting. To reach the
8
The `two-strikes' test
minimum of three directors, the remaining positions will be filled by those
with the highest percentages of votes favouring their appointment cast at
the spill meeting on the resolution for their appointment (even if less than
half the votes cast on the resolution were in favour of their appointment).
If two or more individuals have the same percentage of votes, the
remaining director/s can choose which individual is appointed as a
director, and this appointment must be confirmed at the company's next
AGM. [Schedule 1, Item 13, section 250X]
1.22 Under the new law, if a director survives the spill meeting, the
duration of their appointment continues uninterrupted from the date at
which they were last appointed to the board [Schedule 1, Item 13, section
250Y]. This is intended to provide continuity and ensures that such
directors do not obtain a `fresh start' in terms of the duration of their
appointment.
Application and transitional provisions
1.23 The new law will apply to resolutions on the remuneration
report held after 1 July 2011. That is, the spill resolution will be triggered
where both strikes occur after 1 July 2011.
9
Chapter 2
Improving accountability on the use of
remuneration consultants
Context of amendments
2.1 The primary responsibility for remuneration arrangements rests
with company boards. However, many boards engage remuneration
consultants to advise them on matters relating to remuneration
arrangements, pay structures and performance hurdles, including strategic
advice on how the levels of remuneration are benchmarked against
industry standards.
2.2 The PC inquiry concluded that a potential for conflicts of
interest can arise where remuneration consultants report directly to the
company executives, or where they provide other services to the same
company. Improved disclosure will help shareholders assess the
independence of the advice that remuneration consultants provide to
boards and their remuneration committees.
2.3 A key concern raised by stakeholders is that remuneration
consultants may be placed in a position of conflict if they are asked to
provide advice on the remuneration of officers who might have the
capacity to affect whether or not that consultant's services will be retained
again (either for remuneration advice or other services the consultant may
provide to the company). For example, a remuneration consultant may
feel that remuneration advice that is unfavourable to the company
executives may compromise their ability to obtain future work from the
company.
2.4 While the advice of remuneration consultants may be influential
in determining a company's remuneration decisions, the responsibility for
remuneration arrangements rests with company directors. It is important
that company directors are accountable to shareholders for ensuring that
remuneration consultants are providing their advice free from undue
influence by those directors to whom the advice might relate.
Summary of new law
2.5 Under the new law, a company's engagement of a remuneration
consultant must be approved by the board or remuneration committee and
the remuneration consultant must report to the non-executive directors
(unless the board consists only of executive directors) or the remuneration
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Corporations Amendment (Improving Accountability on Director and Executive Remuneration)
Bill 2011
committee (unless the company does not have a remuneration committee),
rather than company executives.
2.6 A remuneration consultant that makes a remuneration
recommendation for a company that is a disclosing entity will also be
required to make a declaration that the recommendation is made free from
undue influence by KMP to whom the recommendation relates.
2.7 A company's remuneration report will have to disclose a range
of information about the remuneration consultant and the board will be
required to make a statement about whether the board is satisfied that the
remuneration recommendation was made free from undue influence by
members of the KMP to whom the recommendation relates. The board
must also outline its reasons for being satisfied that such undue influence
has not occurred.
2.8 This reform is intended to deliver greater transparency for
shareholders, and to put them in a better position to assess potential
conflicts of interests associated with the use of remuneration consultants.
It will also facilitate greater independence of remuneration consultants by
ensuring that their advice is provided directly to non-executive directors
or the remuneration committee, rather than the company executives.
Comparison of key features of new law and current law
New law Current law
The engagement of a remuneration Currently, companies are not required
consultant must be approved by the to disclose any details relating to the
board or remuneration committee. use of remuneration consultants.
The remuneration consultant must In addition, there is no requirement
report to non-executive directors or for remuneration consultants to be
the remuneration committee, rather engaged by, and their advice provided
than company executives. directly to, non-executive directors or
The remuneration consultant and the the remuneration committee.
board must make separate
declarations that the recommendation
on remuneration is free from undue
influence by the KMP to which the
recommendation relates.
Companies that are a disclosing entity
will be required to disclose details
relating to the use of remuneration
consultants.
12
Remuneration consultants
Detailed explanation of new law
Engaging remuneration consultants
2.9 Under the new law, before a company enters into a remuneration
consultancy contract, the proposed consultant must be approved by either
the board of directors or the remuneration committee [Schedule 1, Item 8,
subsection 206K(2)]. This requirement applies to a company that is a
disclosing entity that engages a remuneration consultant to make a
remuneration recommendation in relation to one or more members of the
KMP of the company [Schedule 1, Item 8, subsection 206K(1)].
2.10 A remuneration consultant is a person who is not an employee of
the company, and who provides a recommendation on the remuneration of
one or more KMP of the company under a contract for services with the
company. [Schedule 1, Item 4, section 9]
2.11 If a remuneration consultant is engaged without the approval of
the company's board or remuneration committee, it will not affect the
validity of the contract with the remuneration consultant [Schedule 1, Item 8,
subsection 206K(3)]. This will ensure that the remuneration consultant is not
adversely affected by the actions of the company, where they cannot be
expected to be aware of the deliberations of the board or remuneration
committee.
2.12 The company commits an offence if, at the time the company
enters into a contract, the directors or the remuneration committee have
not approved the proposed remuneration consultant [Schedule 1, Item 8,
subsection 206K(4)]. This offence is an offence of strict liability on the
company, as a failure to seek approval would be a serious breach of the
requirements and would diminish board accountability [Schedule 1, Item 8,
subsection 206K(5)].
Remuneration recommendation from remuneration consultants
2.13 Under the new law, a remuneration consultant is required to give
their recommendation on remuneration (known as the remuneration
recommendation) directly to either the directors of the company, or the
remuneration committee, or both. However, they are prohibited from
giving their remuneration recommendation to executive directors, unless
all the directors of the company are executive directors. [Schedule 1, Item 8,
subsections 206L(2) and (3)]
2.14 The Bill relies on the ordinary meaning of the term `executive
director'. An executive director is widely understood to be a full-time
employee of the company who takes part in the daily management of the
company, and is delegated control of the company's activities from the
board of directors. This typically includes, for example, the chief
executive officer and the chief financial officer.
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Corporations Amendment (Improving Accountability on Director and Executive Remuneration)
Bill 2011
2.15 A remuneration recommendation is a recommendation about
how much the remuneration should be and/or the elements of the
remuneration package [Schedule 1, Item 6, section 9B]. The Bill also contains
a regulation making power to prescribe a particular kind of
recommendation or advice as a remuneration recommendation. This
power will provide flexibility to include other types of recommendations
or advice, if required.
2.16 The Bill provides that a contravention of the requirement for a
remuneration consultant to provide the remuneration recommendation to
the directors of the company and/or the remuneration committee is not an
offence [Schedule 1, Item 8, subsection 206L(5)]. This is intended to ensure that
a remuneration consultant is not criminally liable for a failure to prepare
or produce their recommendation altogether (although a remuneration
consultant may face civil liability, for example, a claim for breach of
contract for their failure to do so). In contrast, where the remuneration
consultant prepares the remuneration recommendation and provides it to a
prohibited person, then the remuneration consultant will be guilty of a
criminal offence [Schedule 1, Item 8, subsection 206L(5)].
2.17 Persons other than the remuneration consultant are not prevented
from providing the remuneration recommendation to a person who is
neither a director of the company nor a member of a remuneration
committee [Schedule 1, Item 8, subsection 206L(6)]. This ensures that the
remuneration recommendations can be distributed internally within the
company, for example, to a human resources division within the company
or other support staff.
Declaration by remuneration consultants
2.18 A remuneration consultant who makes a remuneration
recommendation in relation to the KMP of a company that is a disclosing
entity must include with the recommendation a declaration about whether
the consultant's recommendation is made free from undue influence by
the KMP to whom the recommendation relates. [Schedule 1, Item 8,
subsection 206M(2)]
2.19 Failure to comply with this requirement is an offence of strict
liability by the remuneration consultant, as a failure by the remuneration
consultant to make a declaration would be a serious breach of the
requirements, particularly as shareholders require this information to
make an informed assessment about the independence of the remuneration
consultant's recommendations. [Schedule 1, Item 8, subsection 206M(3)]
Disclosure relating to the use of remuneration consultants
2.20 Under the new law, a disclosing entity that is a company or, if
consolidated financial statements are required, the consolidated entity,
will be required to disclose, in its remuneration report, details relating to
14
Remuneration consultants
the remuneration consultant. In particular, the following details are
required to be disclosed:
· the name of the consultant;
· a statement that the consultant made such a recommendation;
· if the consultant provided any other kind of advice to the
company or entity for the financial year, a statement that the
consultant provided that other kind or those other kinds of
advice;
· the amount and nature of the consideration payable for the
remuneration recommendation. This disclosure obligation
may be satisfied by disclosing the aggregate consideration
paid to the named remuneration consultant for remuneration
recommendations (rather than separately disclosing the
consideration paid under multiple contracts with that
particular remuneration consultant);
· the amount and nature of the consideration payable for any
other kind of advice referred to above. This disclosure
obligation may be satisfied by disclosing the aggregate
consideration paid to the named remuneration consultant for
each other category of advice, such as tax advice, legal
advice, and accounting services (rather than separately
disclosing the consideration paid under multiple contracts
with that particular remuneration consultant);
· information about the arrangements the company made to
ensure that the making of the remuneration recommendation
would be free from undue influence by the KMP to whom
the recommendation relates;
· a statement about whether the board is satisfied that the
remuneration recommendation was made free from undue
influence by the KMP to whom the recommendation relates;
and
· if the board is satisfied that the remuneration
recommendation was made free from undue influence by the
KMP to whom the recommendation relates, the board's
reasons for being satisfied with this. This requirement is
intended to provide the board with an opportunity to
demonstrate to shareholders the steps that have been
undertaken to ensure that the remuneration recommendation
is independent.
[Schedule 1, Item 19, paragraph 300A(1)(h)]
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Corporations Amendment (Improving Accountability on Director and Executive Remuneration)
Bill 2011
Application and transitional provisions
2.21 The proposed disclosures concerning the use of remuneration
consultants apply in relation to remuneration reports for financial years
starting on or after 1 July 2011.
2.22 The proposed measures relating to the engagement of
remuneration consultants apply to the execution of contracts on or after
1 July 2011.
2.23 The proposed measures relating to the advice from remuneration
consultants apply to advice given under contracts executed on or after
1 July 2011.
16
Chapter 3
Prohibiting KMP from voting on
remuneration matters
Context of amendments
3.1 Section 250R of the Corporations Act provides that a listed
company must put its remuneration report to a non-binding shareholder
vote at the AGM.
3.2 Currently, the Corporations Act does not prohibit directors or
executives, whose remuneration is disclosed in the remuneration report
from participating in the non-binding vote on remuneration if they hold
shares in the company. This includes the voting of their shares and any
undirected proxies which may have been nominated to them.
3.3 While section 224 of the Corporations Act prohibits related
parties and their associates from casting a vote on related party
transactions, it does not extend the prohibition to the non-binding vote
contained in section 250R. Section 195 also provides that a director must
not vote on a matter involving material personal interests, although an
exception exists in relation to the director's remuneration.
3.4 The PC inquiry concluded that there is a conflict of interest that
exists with directors and executives voting on their own remuneration
arrangements. As these directors and executives have an interest in
approving their own remuneration arrangements, allowing them to
participate in the non-binding vote may result in a higher approval vote on
the remuneration report than might otherwise be achieved. This could
distort the outcome of the non-binding vote and diminish its effectiveness
as a feedback mechanism to the board.
Summary of new law
3.5 Under the new law, KMP and their closely related parties will be
prohibited from participating in the non-binding shareholder vote on
remuneration and on the spill resolution. In addition, KMP and their
closely related parties will be prohibited from voting undirected proxies
on all remuneration related resolutions.
3.6 In order to ensure that shareholders continue to have the right to
empower the chair of the meeting to vote undirected proxies on their
behalf, a KMP or their closely related party will be able to vote undirected
proxies on remuneration related resolutions if they are the chair of the
meeting at which the resolution is voted on and the shareholder expressly
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Corporations Amendment (Improving Accountability on Director and Executive Remuneration)
Bill 2011
provides informed consent for the chair to exercise the proxy even if the
resolution is connected with the remuneration of a member of the KMP.
Comparison of key features of new law and current law
New law Current law
KMP and their closely related parties KMP and their closely related parties
that hold shares will be prohibited can participate in the non-binding
from voting their shares in the shareholder vote on remuneration,
non-binding vote and the spill including by exercising undirected
resolution. proxies.
KMP and their closely related parties
will only be able to vote undirected
proxies on remuneration related
resolutions when they are the chair of
the meeting and the shareholder has
expressly given their informed
consent for the chair to exercise the
proxy.
Detailed explanation of new law
Voting of own shares
3.7 Under the new law, a KMP, their closely related party or any
person acting on behalf of the KMP or their closely related party, must not
cast a vote in the non-binding resolution on the remuneration report or on
the resolution on the spill meeting. [Schedule, Items 12 and 13,
subsections 250R(4) and 250V(2)]
3.8 An exception to this prohibition exists where the person is
exercising a directed proxy (which specifies how the proxy is to vote on
the proposed resolution) on behalf of someone other than the KMP or the
closely related party. [Schedule 1, Item 12, subsection 250R(5)]
3.9 The Bill provides the Australian Securities and Investments
Committee (ASIC) with the ability to provide relief from the prohibition,
where it would not cause unfair prejudice to the interests of any
shareholder of the listed company [Schedule 1, Item 12, subsection 250R(6)].
This is intended to provide flexibility in cases where the prohibition
would lead to harsh or unintended outcomes. The written declaration
made by ASIC is not a legislative instrument within the meaning of
section 5 of the Legislative Instruments Act 2003.
3.10 A vote cast in contravention of the prohibition does not affect
the validity of the resolution. It is, however, taken to have not been cast
18
Prohibiting KMP from voting on remuneration matters
and will not be counted in determining whether the resolution passed.
[Schedule 1, Item 12, subsection 250R(8)]
Voting of undirected proxies
3.11 Under the new law, a KMP or their closely related party that is
appointed as a proxy must not exercise the proxy on a resolution
connected directly or indirectly with the remuneration of a KMP if the
proxy is undirected (that is, if the appointment does not specify the way
the proxy is to vote on the resolution). [Schedule 1, Item 10,
subsection 250BD(1)]
3.12 However, the prohibition in subsection 250BD(1) will not apply
if the person is the chair of the meeting at which the resolution is voted on
and the shareholder expressly provides informed consent for the chair to
exercise the proxy even if the resolution is connected, directly or
indirectly, with the remuneration of a member of the KMP of the
company or consolidated entity [Schedule 1, Item 10, Subsection 250BD(2)].
Informed consent would be obtained where the appointment expressly
authorises the chair to exercise the proxy even if the resolution is
connected directly or indirectly with the KMP's remuneration. Such
authorisation could be obtained, for example, by completing a proxy form
containing the statements set out in ASX Listing Rule 14.2.3B.
3.13 The Bill provides ASIC with the ability to provide relief from
the prohibition, where it would not cause unfair prejudice to the interests
of any shareholder of the company [Schedule 1, Item 10, subsection 250BD(3)].
This is intended to provide flexibility in cases where the prohibition
would lead to harsh or unintended outcomes. The written declaration
made by ASIC is not a legislative instrument within the meaning of
section 5 of the Legislative Instruments Act 2003.
3.14 A vote cast in contravention of the prohibition does not affect
the validity of the resolution. It is, however, taken to have not been cast
and will not be counted in determining whether the resolution passed.
[Schedule 1, Item 10, subsection 250BD(4)]
Application and transitional provisions
3.15 The proposed prohibition on KMP (and their closely related
parties) voting in the non-binding vote applies in relation to voting on or
after 1 August 2011, irrespective of whether the remuneration report
concerned relates to a financial year starting before, on or after
1 August 2011.
3.16 The proposed prohibition on KMP (and their closely related
parties) voting undirected proxies in remuneration related resolutions
applies in relation to voting on or after 1 August 2011, irrespective of
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whether the matter that is the subject of the resolution relates to a time
before, on or after 1 August 2011.
3.17 The 1 August 2011 application date is a one month delay from
most other measures in the Bill and provides transitional relief for
companies that are scheduled to hold their annual general meetings in
July 2011 and, as such, are due to finalise their meeting notice papers in
May/June 2011.
20
Chapter 4
Prohibiting hedging of incentive
remuneration
Context of amendments
4.1 An important component of remuneration is `incentive'
remuneration (or `at risk' remuneration). Incentive remuneration aligns
the interests of management with the interests of shareholders. This is
often achieved by providing equity-based remuneration, for example,
shares and options.
4.2 Currently, however, it is possible for directors and executives to
`hedge' their exposure to incentive remuneration. Typically, this involves
the director or executive entering into a third party contract (such as
trading in derivatives) to reduce their current exposure and mitigate their
personal financial interest in the company's success.
4.3 The effect of hedging incentive remuneration is to `de-link'
remuneration from company performance. The PC inquiry concluded that
this practice is inconsistent with a key principle underlying Australia's
remuneration framework that remuneration should be linked to
performance. There is also a real, as well as perceived, conflict of interest
with a director or executive entering into an arrangement where they stand
to benefit if the company's share price falls.
4.4 In 2007, the Corporations Act was amended to require
disclosure of the company's policy in relation to directors and executives
hedging their incentive remuneration, and how the company enforces this
policy. While this disclosure ensures that shareholders are informed about
the company's policy on hedging incentive remuneration, it does not
prohibit this practice.
Summary of new law
4.5 KMP and their closely related parties will be prohibited from
hedging the KMP's incentive remuneration. This will ensure that KMP,
and their closely related parties, cannot undermine the purpose of their
incentive remuneration, which is to align remuneration with performance.
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Comparison of key features of new law and current law
New law Current law
Prohibit KMP and their closely KMP and their closely related parties
related parties from hedging can hedge the KMP's exposure to
remuneration that depends on the remuneration. The company's
satisfaction of a performance hedging policy must be disclosed in
condition. the annual report.
As a result of the prohibition, the
current disclosure requirement is
redundant and is no longer required.
Detailed explanation of new law
4.6 Under the new law, a KMP of a company that is a disclosing
entity and the KMP's closely related parties, must not enter into an
arrangement (with anyone) if it has the effect of limiting the KMP's
exposure to risk relating to an element of the KMP's remuneration that is
unvested (due to time or other conditions) or is vested but remains subject
to a holding lock. [Schedule 1, Item 8, subsection 206J(1)]
4.7 The Bill provides a regulation making power to set out a
non-exhaustive list of the types of arrangements that would, and would
not, be considered to be a `hedge' that would limit a KMP's exposure to
risk [Schedule 1, Item 8, subsection 206J(3)]. This will provide flexibility to
clarify specific cases that will, or will not, be considered to be a hedge,
given the range of potential transactions that may be affected by the
prohibition.
4.8 The Bill also provides that ASIC may make a declaration that
the prohibition on hedging does not apply to a specified arrangement if it
is satisfied that the prohibition would be unreasonable in the circumstance
[Schedule 1, Item 8, subsection 206J(8)]. This will ensure that ASIC can
promptly address any harsh or unintended outcomes. The written
declaration made by ASIC is not a legislative instrument within the
meaning of section 5 of the Legislative Instruments Act 2003.
4.9 A KMP that hedges their exposure to risk commits an offence
[Schedule 1, Item 8, subsection 206J(4)]. This offence is an offence of strict
liability on the KMP as the KMP is responsible for any transaction that he
or she may enter into in breach of these requirements [Schedule 1, Item 8,
subsection 206J(5)]. The KMP also commits an offence where their closely
related party hedges and the KMP was reckless as to the contravention
[Schedule 1, Item 8, subsection 206J(6)]. This will ensure that the new law
cannot be circumvented by the KMP having their closely related parties
hedge their remuneration.
22
Prohibition on hedging
4.10 A closely related party of the KMP that intentionally
contravenes this requirement commits an offence. [Schedule 1, Item 8,
subsection 206J(7)]
Application and transitional provisions
4.11 The proposed prohibition on hedging applies to entry into
arrangements on or after 1 July 2011, irrespective of whether the
remuneration was for services rendered before, on or after 1 July 2011.
23
Chapter 5
No vacancy rule
Context of amendments
5.1 The `no vacancy' rule allows a board to declare that it has no
vacant positions even though the maximum number of directors allowed
by the constitution has not been reached. `No vacancy' resolutions make
the election of new directors difficult because if a no vacancy resolution is
passed, non-board endorsed candidates need to gain more votes than a
board endorsed candidate as well as receiving more than 50 per cent of the
vote to be elected. A `no vacancy' resolution can therefore make it
extremely difficult for a non board endorsed candidate to join a board.
5.2 The PC inquiry concluded that the `no vacancy' rule provides
boards with considerable power over the composition of the board. The
declaration of the rule can make it more difficult for outside nominees to
be voted onto a board. These people need to run against an incumbent
director or a board-endorsed nominee, both categories which generally
receive high favourable votes and are difficult for an outside nominee to
defeat in a direct contest.
5.3 As such, the `no vacancy' rule makes it difficult for shareholders
to address concerns that a board is functioning in a `closed shop' fashion,
does not have sufficient independence from management, or fails to
nominate and recruit new members with the right characteristics to ensure
board decisions are made in the best interests of the company. For this
reason, the `no vacancy' rule has been identified as inhibiting appropriate
shareholder oversight of company boards.
Summary of new law
5.4 A company will be required to obtain the approval of its
shareholders for a declaration that there are no vacant board positions in
the case where the number of board positions filled is less than the
maximum number specified in the company's constitution. If agreed, the
declaration lasts until the following AGM. This requirement will apply to
public companies.
5.5 Any appointment of a director made while the declaration is in
place must be confirmed by a resolution of members at the following
AGM, or the appointment lapses at the conclusion of that AGM.
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Comparison of key features of new law and current law
New law Current law
Public companies will be required to There is no current law equivalent to
obtain the approval of shareholders this provision. Public companies are
for a declaration that there are no able to declare that there are no
vacant board positions, should the vacant board positions without the
number of board positions filled be approval of shareholders.
less than the maximum number
specified in the company's
constitution.
Detailed explanation of new law
5.6 Companies will be required to obtain the approval of their
shareholders in order to declare at a general meeting (either an AGM or an
extraordinary general meeting) that there are no vacant board positions, in
the case where the number of positions filled on the board is less than the
maximum allowable under the company's constitution. The need for
shareholder approval applies regardless of whether the board limit is the
subject of a new resolution or the decreasing of a lower maximum. If
agreed, the declaration will be in force until the following AGM.
[Schedule 1, item 30, section 201P]
5.7 Notice of intention to obtain shareholder approval to declare that
there are no vacant board positions must be lodged with ASIC and
notified to shareholders as part of the notice convening the meeting, along
with an explanatory statement. The notice must specify the board limit
that is being agreed upon. The explanatory statement must set out the
view of the board on the proposed resolution and information to assist
shareholders to determine whether the proposed resolution is in the
company's interest. [Schedule 1, item 30, section 201S, paragraph 201P(1)(c),
section 201Q]
5.8 If a `no vacancy' resolution is not passed, a non-board endorsed
candidate will have the ability to stand for election for a vacant board
position. If shareholders agree to a `no vacancy' resolution, a non-board
endorsed candidate will still be able to stand for election if there is an
election for directors, whether this be where an incumbent director is up
for re-election or retires, or where the shareholders remove a director.
5.9 Following passage of a `no vacancy' resolution, boards may fill
board positions through the year, but such appointments must be
confirmed by shareholders at the following AGM, or the appointment
lapses at the conclusion of that AGM. [Schedule 1, item 30, subsections 201P(3)
and (4)]
26
No vacancy rule
5.10 Where a company does not comply with the requirement that
shareholder approval be sought for a `no vacancy' declaration, but the
company declares no vacancies at a general meeting, that declaration will
be made void until the requisite shareholder approval is obtained, and any
appointments of director made at the general meeting will be invalid.
[Schedule 1, item 30, section 201U]
5.11 Where a company prevents a person from putting themselves
forward as a director at a general meeting on the basis that the board has
instituted a `no vacancy' rule, but that rule has not been agreed by
shareholders of the company, the person may institute Court proceedings
against the company for loss or damage suffered as a consequence of not
being able to be considered by the general meeting for appointment to the
board. [Schedule 1, item 30, section 201U]
5.12 Where a company appoints a director in breach of the new
provisions the appointment will be invalid. In addition, a company or a
person who suffers loss or damage because of the setting of a board limit
in contravention of the provisions may institute a proceeding in the court.
[Schedule 1, item 30, subsections 201U(5) and (6)]
Application and transitional provisions
5.13 The provisions will apply in relation to the setting of board
limits on or after 1 July 2011.
27
Chapter 6
Cherry picking
Context of amendments
6.1 Proxies are used by shareholders that are not able to attend a
company meeting but who still wish to vote. Appointing a proxy involves
a shareholder appointing an individual to represent them at a general
meeting (either an AGM or an extraordinary general meeting). The
appointed representative may or may not be a shareholder of the company
for which the general meeting is being held. The proxy rules in the
Corporations Act are contained in Division 6 of Part 2G.2.
6.2 Shareholders can provide directed proxies, which specify how
they wish the proxy holder to vote on a resolution, or undirected proxies,
which enable the proxy holder to choose how to vote.
6.3 Currently, all directed proxies held by the chair must be voted.
However, non-chair proxy holders can choose which proxies to vote. This
gives non-chair proxy holders the ability to choose to exercise only those
votes that support their position, and to not exercise votes that do not
accord with their position on a resolution. This is called `cherry picking'.
6.4 The PC concluded that cherry picking impairs the transparency
and effectiveness of shareholder voting on remuneration issues. It enables
the wishes of shareholders to be ignored and can result in outcomes that
do not clearly reflect shareholder views on a resolution. It can also
facilitate conflicts of interest of non-chair proxy holders.
6.5 While the PC inquiry recommended changes to the law in the
context of voting on remuneration reports, the principle behind removing
the ability for proxy holders to `cherry-pick' can be applied to shareholder
voting more generally.
Summary of new law
6.6 The new law will require that non-chair proxies vote as directed
when they vote on a poll. It will also prohibit proxy holders from
`cherry-picking' the proxies they exercise, by requiring that any directed
proxies that are not voted will automatically default to the Chair, who is
required to vote the proxies as directed. This will ensure that directed
proxies are counted as the shareholder intends.
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Comparison of key features of new law and current law
New law Current law
Non-chair proxy holders will be Proxy holders, other than the chair,
required to cast all of their directed are not required to cast all of their
proxies on all resolutions as directed directed proxies on all resolutions,
if they vote. If a nominated proxy but may choose which proxies to cast.
does not vote, the proxy will
automatically default to the chair,
who has a duty to vote all directed
proxies.
Detailed explanation of new law
6.7 The provisions currently at paragraphs 250A(4), (5) and (5A)in
the Corporations Act, dealing with the exercise of directed proxy votes by
the chair and by those other than the chair, will be repealed. [Schedule 1,
item 33]
6.8 A new provision, section 250BB, will provide for all situations
where a proxy appointment specifies the way to vote. This section
provides that if the proxy is the chair of the meeting the proxy must vote
on a poll, and must vote as directed. [Schedule 1, item 34,
paragraph 250BB(1)(c)]
6.9 If the proxy holder is not the chair, the proxy need not vote, but
if they do, they must vote as directed. The offence provision has been
refined in cases where a non-chair proxy holder does vote but does not
vote as directed. This provides that a non-chair proxy will not be liable
unless he or she agreed to the appointment or held him or herself out as
being willing to act as a proxy, or allowed another person to do so. The
proxy who voted but did not vote as directed will be subject to a fine.
There is no offence for a proxy who fails to vote. [Schedule 1, item 34,
paragraph 250BB(1)(d) and subsections 250BB(3) and (4)]
6.10 If a nominated proxy does not register as attending the meeting
or does not vote, the proxies not exercised in a poll vote will default to the
chair, who has a duty to vote the proxies as directed. These provisions
ensure that all proxies are voted, thereby ensuring that shareholder
instructions are voted as intended. [Schedule 1, item 34, section 250BC]
6.11 This situation provides for the chair to become the proxy, and
vote as directed, after a nominated proxy has failed to vote. Each
company has the ability to work out the best way for the default system to
work within their timeframes for voting whilst ensuring that chairs have
enough time to cast defaulted proxies. Obviously, this procedure may
vary from company to company. It is anticipated that for some companies
30
Cherry picking
this may require a two stage voting process, where votes are cast and all
proxies are checked before the unvoted proxies default to the chair.
Application and transitional provisions
6.12 The new provision will apply to proxies appointed on or after
1 August 2011.
6.13 The 1 August 2011 application date is a one month delay from
most other measures in the Bill and provides transitional relief for
companies that are scheduled to hold their annual general meetings in
July 2011 and, as such, are due to finalise their meeting notice papers in
May/June 2011.
31
Chapter 7
Persons required to be named in the
remuneration report
Context of amendments
7.1 Currently, the Corporations Act requires that the remuneration
details for the KMP and the five most highly remunerated officers (if
different) be disclosed in the remuneration report in relation to both the
parent entity and the consolidated entity.
7.2 For large companies, the KMP are likely to include the five most
highly remunerated officers. In addition, there can often be overlap
between the KMP of the parent company and the KMP of the consolidated
entity. This unnecessarily adds complexity to the regulatory framework.
7.3 The PC inquiry concluded that the requirement to disclose the
five most highly remunerated officers should be removed, and confined
only to KMP. In addition, the Government announced that it would also
remove the requirement to include separate disclosures on the officers of a
parent company, in order to further simplify the remuneration report.
Summary of new law
7.4 Under the new law, remuneration disclosures will only be
required for the KMP of the consolidated entity.
7.5 This will simplify the disclosures in the remuneration report, to
enable shareholders to better understand the company's remuneration
arrangements. This measure will also reduce the regulatory burden on
companies, while maintaining an appropriate level of accountability.
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Comparison of key features of new law and current law
New law Current law
Remuneration disclosures will be Remuneration disclosures apply to
confined to the KMP of the the KMP of the consolidated and
consolidated entity. parent entities (and the five most
highly remunerated officers, if
different).
Detailed explanation of new law
7.6 The Bill amends paragraph 300A(1)(a) by requiring disclosures
in relation to the consolidated entity only (or if consolidated financial
statements are not required, the company). [Schedule 1, Item 14,
paragraph 300A(1)(a)]
7.7 The Bill also amends paragraph 300A(1)(c) by removing the
requirement for the details of the five most highly remunerated officers to
be disclosed. [Schedule 1, Items 15 and 16, paragraph 300A(1)(c)]
Application and transitional provisions
7.8 The proposed measure applies in relation to remuneration
reports for financial years starting on or after 1 July 2011.
34
Chapter 8
Regulation impact statement
Background
8.1 In March 2009, the Government tasked the Productivity
Commission (PC) to conduct a broad-ranging inquiry into the regulation
of executive remuneration, to ensure that remuneration packages are
appropriately structured and do not reward excessive risk taking or
promote corporate greed.
8.2 This inquiry came at a time when there was significant
community concern that executive pay practices were excessive. While
shareholder value fell as a result of the global financial crisis, executive
pay was perceived to have remained unchanged, cementing the view that
executives were rewarded for failure.
8.3 Highlighted as another area of concern is the widening gap
between the remuneration of executives and other employees is a real and
legitimate issue. Chief Executive Officer (CEO) remuneration at the
50-100 largest Australian listed companies increased between 1993 and
2007 by as much as 300 per cent in real terms.
8.4 The PC's final report was publicly released on 4 January 2010.
The report examines issues such as trends in remuneration, current
disclosure requirements and the role of boards' shareholders and
institutional investors.
8.5 Following extensive public consultation, the report concluded
that Australia's corporate governance and remuneration framework is
ranked highly internationally. However, the report makes a number of
innovative recommendations to further strengthen Australia's
remuneration framework.
8.6 These recommendations are designed to improve board
capacities, reduce conflicts of interest, encourage stakeholder engagement,
improve relevant disclosure and support well conceived remuneration
policies.
8.7 There are approximately 2000 listed entities that prepare an
audited remuneration report. The PC's recommendations will impact on
the way these companies structure their remuneration arrangements for
company directors and executives.
8.8 In terms of direct impact on the community, the Australian
Securities Exchange (ASX) 2008 Australian Share Ownership Study
found that 41 per cent of adult Australians participated in the Australian
share market. This ranks Australia among the leading share-owning
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Corporations Amendment (Improving Accountability on Director and Executive Remuneration)
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nations in the world on a per capita basis. Only the United States, with
45 per cent of share ownership among households, ranks higher.
An overview of some of these recommendations is set out below.
Improving Board Capacities
8.9 The recommendation to amend the `no vacancy' rule in the
legislation is designed to improve board capacities, with the view to
encourage shareholder democracy while maintaining operational
flexibility.
Reducing Conflicts of Interest
8.10 The recommendations that are designed to avoid potential
conflicts of interest and manage conflicts more effectively include:
· prohibiting company directors and executives from voting on
the remuneration report or any resolutions related to those
reports;
· barring executives from hedging unvested equity
remuneration or vested equity subject to holding locks;
· disallowing company directors and executives from voting
undirected proxies on remuneration reports or any resolutions
related to those reports; and
· requiring proxy holders, except in exceptional circumstances,
to cast all their directed proxies on remuneration reports and
any resolutions related to those reports.
Improving Relevant Disclosure
8.11 The recommendation to amend the legislation to reflect that
individual remuneration disclosures be confined to the KMP of the
company. This will reduce the regulatory burden of having to make
disclosures for the top five executives as well.
Well-conceived Remuneration Policies
8.12 The recommendation is designed to provide shareholders with
an opportunity to signal whether they support a company's remuneration
policy. The `two-strike' proposal will allow the practical application of
the recommendation, while limiting the transaction costs of the regulation.
36
Regulation impact statement
Identification of options, impact analysis, conclusions and
recommendations
The `no vacancy' rule
Problem
8.13 Some companies have a `no vacancy' rule in their constitution (a
document governing the internal operation of a company). This rule
allows the board complete discretion to declare that it has no vacant
positions even though the maximum number of directors has not been
reached. This makes it very hard for non-board endorsed nominees to be
elected to the board because in circumstances of `no vacancy' they must
gain more votes than a board endorsed nominee as well as more than
50 per cent of the vote, which is often very difficult.
8.14 The `no vacancy' rule gives boards a lot of power over their
composition compared to shareholders. In practice, boards can use the
rule to make it extremely difficult for non-board endorsed nominees to be
voted onto the board. The lack of any checks and balances on the exercise
of the `no vacancy' rule, has lead to the perception that it supports low
levels of contestability for board positions. It has also been identified as
providing an avenue for boards to behave opportunistically in relation to
membership and decision-making, including in regards to executive
remuneration.
8.15 There is a wide perception that the regulatory system as a whole
can facilitate remuneration outcomes that:
· misalign the interests of management and shareholders;
· were made in an environment in which boards have
significant discretion;
· cannot be fairly contested by shareholders; and
· lack transparency and independence.
8.16 In its report, the PC identified the `no vacancy' rule as
contributing to these types of outcomes. This is because of its relationship
to the way in which boards are constituted, particularly in relation to
board renewal.
8.17 One of the most crucial board functions is to align the interests
of shareholders and managers. To do this effectively, boards must have
appropriate mechanisms to oversee executive performance. Remuneration
arrangements play an integral role in achieving this. As such, it is vital
that boards structure remuneration packages to provide incentives for
executives to behave in the manner that will produce the best results for
the company. Accordingly, it is important that shareholders have practical
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and workable mechanisms to improve the situation when they are not
confident that the board is performing this task well enough, for example
because it lacks independence from management, or does not nominate or
recruit members with the right characteristics to ensure the best decisions
are made.
8.18 The `no vacancy' rule has been identified as a feature of the
regulatory system which perpetuates these problems due to its potential
use to block the election of `new blood' and its effect in diminishing the
impact of the shareholders' ultimate sanction of voting a director off the
board.
Evidence
8.19 In its report, the PC referred to evidence which shows that many
non-executive directors (NEDs) have a background as corporate senior
executives. For example, in 2000, 35 per cent of NEDs were retired
CEO's. The fact that many NEDs are drawn from this small group is
supported by evidence showing that of board positions in the ASX 200,
8 per cent are occupied by females which correlates with a similarly small
number of females in these `feeder positions'. The concept that NEDs are
being drawn from a `thin gene pool' creates greater potential for boards
aligning too closely with management and lacking independence in
decision making, particularly with regards to remuneration.
8.20 While this evidence highlights potential problems with there
being an `inertia' towards boards hiring internally or from a shallow pool
of `known quantities', there is little conclusive evidence that low levels of
contestability for board positions and lack of effective shareholder
oversight leads to excessive or unwarranted levels of executive
remuneration. However, there is a strong perception that this is the case.
Objectives of Government action
8.21 The broad objectives of this proposal would be to:
· enhance current arrangements to enable greater contestability
by reducing unwarranted barriers to entry for non-board
endorsed nominees;
· improve shareholders oversight and influence over board
composition; and
· provide encouragement for boards to improve board
accountability and transparency to shareholders in relation to
remuneration outcomes.
38
Regulation impact statement
Options that may achieve objectives
Option A: Status quo
· Boards of companies that have a `no vacancy' rule would
still be able to unilaterally invoke the rule of their own
volition. The rule can only be removed from the constitution
by special resolution.
Option B: Require boards to seek shareholder approval to invoke the
`no vacancy' rule
· Boards would be required to seek shareholder approval to
invoke the `no vacancy' rule. Shareholders would need to
pass an ordinary resolution before the board can declare it
has no vacancies.
Option C: Require boards to seek shareholder approval to invoke the
`no vacancy' rule but enable boards to retain flexibility to appoint
directors, and fill or leave casual vacancies, throughout the year subject
to shareholder approval at the next AGM
· Companies would be required to seek shareholder approval
to invoke the `no vacancy' rule. However, if shareholders
agree to declare no vacancies, the board would retain the
flexibility to appoint additional directors throughout the year,
or to fill or leave vacancies that might arise. Shareholders
would then vote on any such appointments at the next AGM.
Impact analysis
Option A: no change
Shareholders
There will be no change for shareholders under this option.
· Boards will continue to have a large degree of control over
their composition compared to shareholders. This is because
boards can invoke the rule without any checks or balances,
and it also has the potential to prevent the election of `new
blood' and entrench the positions of incumbent directors.
This puts shareholders in a position where they have little
opportunity to have effective input into the composition of
their company's board, particularly where they may have lost
confidence in the board or some of its members to make
good decisions in relation to executive remuneration.
· The `no vacancy' rule also has the potential to produce
perverse consequences. For example, where one candidate
for a board seat receives a 96 per cent favourable vote, and a
competitor receives a 94 per cent favourable vote, only the
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Corporations Amendment (Improving Accountability on Director and Executive Remuneration)
Bill 2011
first candidate will get a position despite the clear indication
that shareholders overwhelmingly want both candidates on
the board.
· Under this option, the only way the `no vacancy' rule can be
amended or removed from a company's constitution is by
shareholders passing a special resolution. This would
involve very high transaction costs for shareholders due to
the need to mobilise the large number of dispersed retail
investors and institutional investors needed to pass such a
resolution, and the potential need to hold an Extraordinary
General Meeting.
Companies
· There are no impacts for companies under this option.
Boards that have the `no vacancy' rule in their constitution
will still be able to invoke the rule unilaterally. Boards
would be able to continue to use the rule for any purpose they
see fit, including to block the election of people they do not
wish to attain membership. Boards would also retain
complete flexibility to appoint new directors throughout the
year, subject to approval of shareholders at the next AGM.
Government
There are no impacts for Government under this option.
Table 8.1 Option A
Benefits Costs
Shareholders Limited practical ability to
effectively influence the
composition of boards when
shareholders lack confidence
in boards making optimal
decisions about remuneration.
Companies Boards have complete
flexibility in regards to their
composition.
Might have beneficial
effects for cohesiveness.
Option B: Require boards to seek shareholder approval to invoke the
`no vacancy' rule
Shareholders
· Under this option, shareholders would be provided with a
mechanism to have a greater say in board composition. They
40
Regulation impact statement
would be able to prevent boards from invoking the `no
vacancy' rule where it is contrary to their interests.
Basically, shareholders would be placed in a position to
decide whether they are happy for the board to determine
whether its composition is appropriate, or whether the
shareholders want to retain some flexibility and power over
board composition throughout the year.
· This option would provide greater scope for shareholders to
vote new directors on to the board. It would also make the
threat of shareholders invoking the ultimate sanction of
voting a director off a board more realistic.
· Given that this option would improve the power and
influence given to shareholders, it would encourage boards to
provide more information to shareholders to justify a
resolution to declare no vacancies. This would help
shareholders to make more fully informed voting decisions
and would improve the accountability and transparency of
boards.
Companies
· Under this option, boards could not invoke the `no vacancy'
rule without shareholder approval by ordinary resolution at
the AGM. Where shareholders agree that there should be no
vacancies, boards would lose the flexibility to appoint new
directors throughout the year. This could cause the company
to lose an opportunity if a good candidate became available.
· Where shareholders do not agree to the resolution, the board
may look to increase its size or reduce the constitutional
maximum to prevent shareholders voting in unendorsed
candidates. This would not be an efficient or desirable
outcome for companies or shareholders. However, it is
considered that the practical likelihood of these
circumstances eventuating is low because, traditionally,
shareholders are conservative and tend to support their
boards. For example, it would be exceptionally unlikely that
a candidate without board endorsement would receive the
'50 per cent plus one' votes needed to obtain a board
position, or that a resolution to declare no vacancies would
fail if put up by a board with the confidence of its
shareholders
· It is unlikely this option would add measurably to cost or
complexity for shareholders or the company. Shareholders
vote on many resolutions at AGMs and this would simply
add one more to that list. Companies may incur costs if they
choose to provide shareholders with information about why
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they wish to declare no vacancies, however, it is considered
these costs would be minimal and outweighed by the benefit
to shareholders.
Government
· This option may involve some cost for government through
the need for the Australian Securities and Investments
Commission to monitor compliance with a new regulation.
· This option may also have benefits for government through
improving board transparency and accountability, and
enhancing corporate governance practices. This would lead
to costs savings associated with the decreased need to
implement more regulation and enforce regulatory breaches.
Table 8.2 Option B
Benefits Costs
Shareholders Shareholders would have a
mechanism to influence
board composition without
undue cost or practical
obstacles. They would also
be likely to receive more
information from the
company.
Companies Boards lose flexibility to
invoke the `no vacancy'
rule at will, or to appoint
directors throughout the
year.
Government Some benefits through Minor costs associated
improved corporate with monitoring and
governance. enforcing new regulation.
Option C: Require boards to seek shareholder approval to invoke the
`no vacancy' rule but enable boards to retain flexibility to appoint
directors and fill or leave casual vacancies throughout the year
Shareholders
· Under this option, shareholders would have a greater
capacity to affect the composition of their company's board.
The same considerations set out under Option B also apply to
this option.
42
Regulation impact statement
Companies
· Under this option, boards could not invoke the `no vacancy'
rule unilaterally. Shareholders would need to pass an
ordinary resolution at the general meeting agreeing to declare
no vacancies. However, boards would still retain their
flexibility to appoint directors throughout the year, subject to
shareholder approval at the next AGM.
· The same considerations set out under Option B also apply to
this option, except for the loss of board flexibility following
the approval of a `no vacancy' resolution.
Government
The same considerations set out under Option B also apply to this option.
Table 8.3 Option C
Benefits Costs
Shareholders Shareholders would have a
mechanism by which they can
influence board composition
without undue cost or practical
obstacles.
They would be likely to receive
more information from the
company.
Companies Boards retain flexibility to appoint Boards lose flexibility
directors between AGMs subject to to invoke `no
shareholder approval at the next vacancy' rule at will.
AGM.
Government Some benefits through improved Minor costs
corporate governance. associated with
monitoring and
enforcing new
regulation.
Consultation
8.22 Extensive consultation was undertaken by the PC involving
members of the public, companies, governance consultancy groups, and
stakeholder groups representing a variety of interested parties including
directors, company secretaries and shareholders. Over 170 written
submissions were received and the PC also conducted hearings. It should
be noted that the submissions received related to the PC's draft
recommendation which is equivalent to Option B.
8.23 In general, the recommendation of the PC was supported by
governance and management consultancy groups and investor groups, and
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was not supported by stakeholders representing the banking sector,
directors, company secretaries, institutional investors, and business.
However, many of the concerns were addressed by the PC in framing its
final recommendation and are therefore no longer relevant. For example,
the central concern was that boards would lose the flexibility over
appointments throughout the year (raised by Chartered Secretaries
Australia (CSA) and the Business Council of Australia (BCA), among
others).
8.24 Other views on the draft recommendation conveyed in the
submissions are set out below.
· Submissions from CSA and the Australian Institute of
Company Directors, among others, conveyed the view that
actions taken to improve executive remuneration practices
are not an appropriate avenue for attempting to enhance
board diversity.
However, it should be noted that the recommendation to
adopt Option C is not aimed at improving board diversity.
It is aimed at improving what is considered to be a
deficiency in the present corporate governance
framework. While there is little conclusive evidence that
lack of shareholder influence has caused excessive
executive remuneration, there is a strong perception that
shareholders do not have a mechanism that enables
practical action where there is concern that boards may be
identifying too closely with executives when determining
their compensation. The recommended action is designed
to address this, not improve board diversity, despite the
fact increased diversity would be a welcome by-product.
· Submissions from the BCA and some institutional investors,
among others, expressed concern that boards would seek to
increase their size or reduce the maximum size of the board
in order to prevent election of non-endorsed candidates.
These issues were addressed in the preceeding sections. The
PC's Report did not consider them to be credible threats.
· Some submissions from the banking sector and institutional
investors did not support the draft recommendation on the
basis that boards were considered to be in a better position to
determine the board's operational needs than shareholders.
As discussed above, the recommended action to adopt
Option C takes into account the evidence presented to the
PC which indicates that boards that have the confidence
of their shareholders generally receive an extremely
strong `yes' vote (in the vicinity of 96 per cent) to
resolutions at general meetings. It is anticipated that
44
Regulation impact statement
resolutions to declare no vacancies would be no different.
As previously mentioned, this recommendation is
primarily targeted at shareholders who have lost
confidence in their board.
The PC's final recommendation included the ability for
boards to retain the ability to appoint members between
AGMs even where the `no vacancy' rule was invoked at
the AGM. This addition should ameliorate this concern.
· As mentioned above, several submissions expressed support
for the PC's recommendation, including the Australian
Shareholders Association, Regnan, the Australian Council of
Super Investors, Mr Andrew Murray, Riskmetrics, the
Hay Group, the Australian Human Resources Institute, and
Guerdon Associates. This support was based on the
recommendation enhancing the capacity of shareholders to
hold boards accountable and result in a reduction in
remuneration excesses, and the right of shareholders to
choose who they wish to be represented by on the board.
Conclusion and recommended option
Recommended option: Option C
8.25 It is considered that the `no vacancy' rule in its current form
places shareholders at a significant disadvantage compared to boards in
relation to their ability to influence board composition. Option C is
considered to provide a more appropriate balance between the power of
shareholders and boards. Given this shift in power, this option is also
considered to be likely to encourage boards to provide more information
to shareholders.
8.26 The trend in corporate regulation over recent years has been to
increase shareholder engagement and participation, and company
transparency and accountability. As owners of the company, and given
the agency problem faced by shareholders, it is considered that it should
be within their power to decide whether they wish to trust the board to
determine its optimal operational requirements, or whether they wish to
retain some power in this regard. This is seen to be especially important
where shareholders may have lost confidence in the board or some of its
members.
8.27 It is considered that where boards have the confidence of
shareholders, or can demonstrate good reasons to declare no vacancies,
they should not face any difficulty in obtaining shareholder approval to do
so. By contrast, a board that does not obtain approval probably lacks
shareholder confidence. This is the type of situation in which it is
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appropriate for shareholders to have the capacity to demonstrate their
views and effect change. As such, Option C is considered to provide an
appropriate mechanism to increase the contestability of board positions in
situations where they may otherwise have been unduly limited.
8.28 It would not be an efficient outcome if boards were to increase
their size to the constitutional maximum or move a special resolution to
reduce the constitutional maximum in reaction to this option. However,
this is not seen to be a consequence that would commonly eventuate.
8.29 It is considered that the biggest problem with Option B is the
lack of flexibility provided to boards to deal with situations that might
arise during the year. For example, an excellent candidate may become
available for board membership, the board may need additional skills, or
the board may wish to take on an additional member to assist with
succession planning or to provide a handover period prior to retirement of
a director. It would not be appropriate to infringe unnecessarily on this
operational flexibility. Option C addresses these concerns by enabling
boards to retain the flexibility to deal with unexpected operational
requirements, while providing shareholders with an appropriate and real
mechanism to influence board composition in situations where they are
not satisfied the board is acting in the best interests of the company.
The `Two Strikes' Proposal
Problem
8.30 With the separation of ownership of a company from its
management, there is potential for the mangers (the agents) to act in ways
that would not necessarily be in the best interests of investors (the
principals). As noted by the PC, the `principal-agent' problem highlights
the importance of establishing appropriate monitoring and incentive
mechanisms relating to the remuneration-setting process. It also
highlights the importance of ensuring that directors are subject to
appropriate sanction through arrangements, such as the non-binding
shareholder vote on remuneration, to enable the owners to signal their
satisfaction or otherwise with board performance.
8.31 Section 250R of the Corporations Act provides that a listed
company must put its remuneration report to a non-binding shareholder
vote at the annual general meeting (AGM). Subsection 249L(2) also
provides that the notice of the AGM must inform shareholders of the
resolution on the remuneration report that will take place at the meeting.
8.32 Currently, subsection 251AA(2) of the Corporations Act
provides that a listed company is required to disclose to the market the
outcome of the non-binding vote, including the number of votes cast in
46
Regulation impact statement
favour of the report, those cast against the report and the number of
abstentions on the report. ASX listing rule 3.13.2 requires the entity to do
so immediately after the meeting has been held.
8.33 Some concerns have been raised with the non-binding vote,
which has prompted suggestions that the Corporations Act be amended to
strengthen the vote.
8.34 Many submissions to the PC inquiry noted that the introduction
of the non-binding vote has resulted in increased dialogue between
companies and shareholders on remuneration issues. Anecdotal evidence
suggests that some boards are responsive to the non-binding vote, and that
the opportunity for shareholders to cast a vote is having a positive impact
on remuneration polices.
8.35 The PC concluded that while the evidence suggests that boards
are generally responsive to `no' votes, this is not universal. Anecdotal
evidence points to some companies being unresponsive even to significant
`no' votes. The Commission found that nearly five percent of ASX 200
companies had received consecutive `no' votes of 25 per cent or more and
the incidence of this appears to be rising in recent years.
8.36 The Corporations Act currently does not set out any
requirements for when a board proceeds with its remuneration proposals
despite a negative shareholder vote. If shareholders are dissatisfied, they
have the power to vote to remove a director, although this is a somewhat
extreme response, particularly if the director is having a positive impact
on the value of the company.
8.37 As the PC's findings suggest, the current arrangements tend not
to provide sufficient:
· power to shareholders if they are unsatisfied with the
company's remuneration policies;
· incentives or consequences for unresponsive boards; and
· incentives on companies to respond to shareholder concerns.
Objectives of Government action
8.38 The key objective is to address the problems identified above, by
providing a mechanism for shareholders to deal with companies that are
unresponsive to their concerns on remuneration issues. This is expected
to improve remuneration practices, enhance the accountability of
company management and strengthen the non-binding.
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Options that may achieve objectives(s)
Option A: Do nothing
8.39 Under this option, companies would not be required to formally
respond to shareholder concerns on the remuneration issues. While
boards receiving significant `no' votes may face reputational
consequences, there would be no legal requirement for boards to explain
to shareholders how their concerns have been dealt with, or for directors
to have their re-election expedited.
Option B: Two-strikes and re-election process
8.40 Under this option:
· where a company's remuneration report receives a `no' vote
of 25 per cent or more, the board would be required in the
subsequent remuneration report to provide an explanation of
their proposed action in response, and if the board does not
propose any action, the reasons for inaction; and
· where the company's subsequent remuneration report
receives a `no' vote of 25 per cent or more, a resolution be
put that elected directors who signed the directors' report for
that meeting stand for re-election at an extraordinary general
meeting. Notice of the re-election resolution would be
provided ahead of that annual general meeting. If it were to
be carried by more than 50 per cent of eligible votes cast, the
board would be required to give notice that such an
extraordinary general meeting will be held within 90 days.
Option C: Introduce a binding shareholder vote
8.41 Under this option, a binding shareholder vote would be
introduced in relation to executive remuneration. The vote would take
place prior to each executive being appointed to the company.
Impact analysis
Impact group identification
8.42 Affected groups:
· shareholders and other parties with an interest in the
company (for example creditors and employees);
· companies (including company directors and executives);
and
· Government and regulators.
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Regulation impact statement
Assessment of costs and benefits
Table 8.4 Option A: Do nothing
Benefits Costs
Shareholders and other Shareholders do not
parties with an interest necessarily receive an
in the company (for explanation from the
example creditors and company following a
employees) substantive `no' vote,
unless the company
provides the explanation
voluntarily.
Companies (including Companies will not be
company directors and required to provide an
executives) explanation to
shareholders and
company directors will
not be required to
submit for re-election as
a result of two
consecutive `no' votes.
Government/regulators
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Table 8.5 Option B: Two-strikes and re-election process
Benefits Costs
Shareholders and other Shareholders will be
parties with an interest in in a better position to
the company (for hold directors
example creditors and accountable for the
employees) company's
remuneration
policies.
Strengthening the
sanctions for not
adequately
responding to
shareholder concerns
on remuneration
issues will lead to
improved
remuneration
policies.
Companies (including In the unlikely event
company directors and (less than 5 per cent) that
executives) the two-strikes process is
triggered, there will be
compliance costs for
companies in providing
an explanation to
shareholders and holding
an extraordinary general
meeting. The costs
associated with an
extraordinary general
meeting include, for
example, sending notices
and papers to members,
however, these costs are
difficult to quantify as
they can vary
significantly depending.
Companies (including on a number of factors,
company directors and such as the number of
executives) continued shareholders.
Government/regulators
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Regulation impact statement
Table 8.6 Option C: Binding shareholder vote
Benefits Costs
Shareholders and other Shareholders will be A binding vote on
parties with an interest able to determine remuneration would
in the company (for remuneration levels that absolve directors of
example creditors and they consider to be their responsibility to
employees) acceptable shareholders on
remuneration issues, and
would also undermine
their capacity to make
key decisions affecting
the performance of the
company. As a result,
the accountability of
directors would be
diminished, along with
the ability of
shareholders to hold
directors to account on
remuneration issues and
the company's overall
operations
Companies (including Companies would not
company directors and be able to finalise a
executives) contract with an
executive until
shareholder approval
was obtained, and this is
likely to create
considerable uncertainty
and delay, particularly if
the company is looking
to quickly secure a top
executive. Executives
would need to wait for
the next AGM, which
may take several months
(or an extraordinary
meeting at significant
cost to the company and
shareholders), before
their terms could be
finalised and their
appointment confirmed.
A binding vote could be
disruptive to the
operation of the
company, particularly if
a deadlock arose
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Benefits Costs
between shareholders
and management
regarding the
appropriate levels of
remuneration.
The proposal could
affect the
competitiveness of
Australian companies
and their ability to
attract and retain top
executives, particularly
as other jurisdictions
could offer executives
greater certainty about
their levels of
remuneration.
Government/regulators
Consultation
8.43 The Productivity Commission consulted extensively on options
to strengthen the non-binding vote. As part of the consultation process,
the PC consulted on an issues paper outlining preliminary issues and a
discussion draft containing draft recommendations. Submissions were
received were received from key stakeholders including companies,
governance consulting firms, shareholder groups, remuneration
consultants, proxy advisers, legal firms, unions, academics, retail
shareholders and members of the public. In addition, the PC conducted a
series of meetings and roundtables with a range of interested parties.
8.44 The PC found that companies receiving consecutive no votes of
25 per cent or more in 2008 and 2009 represent about 5 per cent of the
ASX200.
8.45 A number of submissions supported the proposed `two strikes'
approach, including the Australian Council of Super Investors (ACSI),
Regnan, and Andrew Murray, as a way to encourage board responsiveness
to shareholder concerns. Other participants, such as CPA Australia,
suggested introducing a `two-strikes' test as a replaceable rule to give
greater discretion to its application.
8.46 Other participants, including the Business Council of Australia,
Chartered Secretaries Australia (CSA) and KPMG opposed the `two
strikes' proposal given the negative consequences that could arise from
dismissing the entire board.
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Regulation impact statement
8.47 The PC gave careful consideration to the various issues raised
by participants and therefore, changed the recommendation to the `two
strikes and resolution' variant to reduce the potential of an unnecessary
extraordinary general meeting.
8.48 Further public consultation on the draft legislation implementing
this reform is also scheduled for 2010.
Conclusion and recommended option
8.49 Option A is not preferred as it does not provide adequate
sanctions in the event that companies do not appropriately respond to
shareholder concerns on remuneration issues.
8.50 Option B is the preferred option, as it will address the problems
identified above and provide an additional level of accountability for
directors and increased transparency for shareholders. Where a company
faces significant `no' votes over two consecutive years, and the company
has not adequately responded to concerns raised by shareholders the
previous year, it is appropriate for the boards of such companies to be
subject to greater scrutiny and accountability through the re-election
process. This option strengthens the non-binding vote and maintains the
fundamental principle underlying Australia's corporate governance
framework that directors are responsible for, and accountable to,
shareholders on all aspects of the management of the company, including
the amount and composition of executive remuneration.
8.51 Option C is not preferred, as there are significant practical
difficulties and costs associated with introducing a binding shareholder
vote on remuneration. If a binding vote on remuneration was introduced,
companies would not be able to finalise a contract with an executive until
shareholder approval was obtained, and this is likely to create
considerable uncertainty and delay, particularly if the company is looking
to quickly secure a top executive. Practically, decisions to engage a
particular executive cannot await some future shareholder vote, as
executives would need to wait for the next AGM, which may take several
months (or an extraordinary meeting at significant cost to the company
and shareholders), before their terms could be finalised and their
appointment confirmed. These concerns were highlighted in the PC's
final report. In addition, a binding vote could potentially be disruptive to
the operation of the company, particularly if a deadlock arose between
shareholders and management regarding the appropriate levels of
remuneration.
8.52 Furthermore, the introduction of a binding vote for shareholders
would represent a fundamental change to the directors' role and their
capacity to manage the company. A fundamental principle underlying
Australia's corporate governance system is that directors are responsible
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to shareholders for managing all aspects of the company's operations,
including setting executive remuneration. A binding vote on
remuneration would absolve directors of their responsibility to
shareholders on this issue, and would also undermine their capacity to
make key decisions affecting the performance of the company. As a
result, the accountability of directors would be diminished, along with the
ability of shareholders to hold directors to account on remuneration issues
and the company's overall operations. It could also affect the
competitiveness of Australian companies and their ability to attract and
retain top executives, particularly as other jurisdictions could offer
executives greater certainty about their levels of remuneration.
Other technical amendments
Prohibiting Directors and Executives Voting on Remuneration Reports
and Voting Undirected Proxies
Problem
8.53 Currently, the Corporations Act does not prohibit directors or
executives that hold shares in the company from participating in the
non-binding shareholder vote on remuneration. While section 224 of the
Corporations Act prohibits related parties and their associates from
casting a vote on related party transactions, it does not extend the
prohibition to the non-binding vote contained in section 250R. Section
195 also provides that a director must not vote on a matter involving
material personal interests, although an exception exists in relation to the
director's remuneration.
8.54 Concerns have been raised where directors and executives,
whose remuneration is disclosed in the remuneration report, can also
participate in the non-binding vote if they hold shares in the company.
8.55 As noted by the PC, the `principal-agent' problem highlights the
importance of establishing appropriate monitoring and incentive
mechanisms relating to the remuneration-setting process. There is a real,
as well as perceived, conflict of interest that exists with directors and
executives voting on their own remuneration packages. As these directors
and executives have an interest in approving their own remuneration
arrangements, allowing them to participate in the non-binding vote may
result in a higher approval vote on the remuneration report than might
otherwise be achieved. This could distort the outcome of the non-binding
vote and diminish its effectiveness.
8.56 In addition, where shareholders provide undirected proxies, the
proxy holder has the discretion to determine how to vote. If shareholders
do not appoint a proxy, the proxy defaults to the Chair of the board, who
is required to vote all directed proxies. As a result, Chairs can exercise
54
Regulation impact statement
undirected proxies, even on resolutions that they are otherwise prohibited
from participating in (for example, a resolution to increase the total pool
of fees paid to directors). In its recent report, the PC noted that it is
inappropriate that directors and executives engaged in the design of
remuneration arrangements should then be able to use undirected proxies
to mute the outcome of that vote.
Objectives of Government action
8.57 The objectives of Government action are to address the
problems identified above by eliminating any conflicts of interests with
directors and executives participating in the non-binding vote to approve
their own remuneration arrangements.
Options to achieve objectives
Option A: No change
8.58 Under this option, the status quo would be maintained by
continuing to allow directors and executives, that are named in the
remuneration report, to participate in the non-binding vote on
remuneration.
8.59 The existing system of corporate governance would continue to
apply. An integral part of this framework is the duties imposed on
directors both by the Corporations Act 2001 and the common law.
Directors must fulfil these duties in carrying out all aspects of their role,
including setting executive remuneration. Generally, directors owe broad
fiduciary duties to the companies they serve. They are required to act
honestly, for the good of the company, and for a proper purpose.
Option B: Require disclosure of how key management personnel have
voted in the non-binding vote on the remuneration report
8.60 Under this option, directors and executives named in the
remuneration report would be required to disclose how they voted in the
non-binding vote.
Option C: Prohibit key management personnel from participating in the
non-binding vote on the remuneration report
8.61 Under this option, directors and executives that are named in the
remuneration report, and their close family members (as defined in the
accounting standards), would be prohibited from participating in the
non-binding shareholder vote on remuneration (including by voting
undirected proxies).
8.62 An exemption to this requirement is proposed where directors
and executives are voting directed proxies for other shareholders (who are
otherwise entitled to vote) in accordance with the directions on the proxy
form. Undirected proxies voted by the Chair would also be exempted,
where shareholders have provided informed consent.
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Impact analysis
Impact group identification
8.63 Affected groups:
· shareholders and other parties with an interest in the
company (for example creditors and employees);
· companies (including company directors and executives);
and
· Government and regulators.
Assessment of costs and benefits
Table 8.7 Option A: Do nothing
Benefits Costs
Shareholders and other Maintains the conflict of
parties with an interest interest that arises with
in the company (for directors and executives
example creditors and voting on their own
employees) remuneration packages,
and can distort the
outcome of the
non-binding vote. The
existing system of
corporate governance
(including directors'
duties) would continue
to apply.
Companies (including
company directors and
executives)
Government/regulators
56
Regulation impact statement
Table 8.8 Option B: Require disclosure of how key management
personnel have voted in the non-binding vote on the remuneration
report
Benefits Costs
Shareholders and other Greater transparency While this option
parties with an interest in for shareholders. improves transparency,
the company (for example it maintains the conflict
creditors and employees) of interest that arises.
Shareholders and other with directors and
parties with an interest in executives voting on
the company (for example their own remuneration
creditors and employees) packages, and can
(continued) distort the outcome of
the non-binding vote.
Companies (including Companies would be
company directors and subject to additional
executives) disclosure requirements
in the remuneration
report.
Government/regulators
Table 8.9 Option C: Prohibit key management personnel from
participating in the non-binding vote on the remuneration report
Benefits Costs
Shareholders and other This option will
parties with an interest in eliminate the conflict
the company (for of interests that arises
example creditors and with company
employees) management voting on
their own
remuneration, and
strengthen the
effectiveness of the
non-binding vote.
Companies (including Potential minor costs
company directors and for companies in
executives) monitoring compliance.
Government/regulators
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Consultation
8.64 The purpose of the non-binding vote on the remuneration report
provides shareholders with an opportunity to signal their support for the
remuneration policy of a company. Numerous submissions to the PC,
including CSA and Riskmetrics, raised the conflict of interest that arises
when directors and executives vote on the remuneration report.
8.65 Origin drew a distinction between directors and executives
voting on the remuneration report, contending that non-executive directors
should not be prohibited from voting their own shares on the report as
their fees are approved directly by shareholders.
8.66 Guerdon Associates did not think that directors should be
excluded from voting on the remuneration report as the Corporations Act
does not allow directors and related parties to exercise votes on
resolutions where they have a pecuniary conflict of interest.
8.67 The ASX supported the prohibition of KMP voting their shares
where there is a direct conflict of interest.
Conclusion and recommended option
8.68 Options A and B are not considered ideal, as they maintain the
conflict of interest that arises with directors and executives voting on their
own remuneration packages, and can distort the outcome of the
non-binding vote.
8.69 Option C is the preferred option, as it will address the problem
identified above by eliminating the conflict of interest that exists with
management voting on their own remuneration. It will also improve the
effectiveness of the non-binding vote as a feedback mechanism for
shareholders and companies.
Hedging Equity Remuneration
Problem
8.70 An important component of remuneration is `incentive'
remuneration (or `at risk' remuneration). Incentive remuneration aligns
the interests of management with the interests of shareholders. This is
usually achieved by providing equity-based remuneration, for example,
shares and options. Typically, incentive remuneration is provided in
addition to any fixed or base salary. Incentive remuneration ensures that
directors and executives, like shareholders, have a personal financial
interest in the success of the company.
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Regulation impact statement
8.71 Currently, however, it is possible for directors and executives to
`hedge' their exposure to incentive remuneration. Typically, this involves
the director or executive entering into a third party contract (such as
trading in derivatives) to reduce their current exposure and mitigate their
personal financial interest in the company's success.
8.72 The effect of hedging incentive remuneration is to `de-link'
remuneration from company performance. This practice is inconsistent
with a key principle underlying Australia's remuneration framework that
remuneration should be linked to performance. There is also a real, as
well as perceived, conflict of interest with a director or executive entering
into an arrangement where they stand to benefit if the company's share
price falls.
8.73 In 2007, the Corporations Act was amended to require
disclosure of the company's policy in relation to directors and executives
hedging their incentive remuneration, and how the company enforces this
policy. While this disclosure ensures that shareholders are informed about
the company's policy on hedging incentive remuneration, it does not
prohibit this practice.
Objectives of Government action
The objectives of Government action are to address the problems
identified above by ensuring that executive remuneration aligns with
shareholders interests and eliminating any conflicts of interests with
directors and executives hedging their exposure to their incentive
remuneration.
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Options to achieve objectives
Option A: No change
8.74 Under this option, the status quo would be maintained by
continuing to allow directors and executives to hedge their exposure to
incentive remuneration.
Option B: Prohibit directors and executives from hedging their
incentive remuneration
8.75 Under this option, directors and executives, and their close
family members (as defined in the accounting standards) would be
prohibited from entering into a transaction that would have the effect of
hedging their incentive remuneration. Under this proposal, the current
disclosure requirement would become redundant and would be repealed.
Impact analysis
Impact group identification
8.76 Affected groups:
· shareholders and other parties with an interest in the
company (for example creditors and employees);
· companies (including company directors and executives);
and
· Government and regulators.
Assessment of costs and benefits
Table 8.10 Option A: Do nothing
Benefits Costs
Shareholders and other parties Permits directors and
with an interest in the company executives to hedge their
(for example creditors and incentive remuneration
employees) which `de-links'
remuneration from
performance.
Companies (including company
directors and executives)
Government/regulators
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Regulation impact statement
Table 8.11 Option B: Prohibit directors and executives from
hedging their incentive remuneration
Benefits Costs
Shareholders and other This option will ensure that
parties with an interest in directors and executives
the company (for example cannot undermine the purpose
creditors and employees) of their incentive
remuneration, which is to
align remuneration with
performance.
Companies (including Companies will no longer
company directors and need to comply with the
executives) current disclosure obligation
relating to hedging.
Government/regulators
Consultation
8.77 The PC did not find evidence through consultations evidence
that would enable an assessment of the extent to which hedging of
unvested entitlements currently occurs. Two companies, Woolworths and
BlueScope Steel, reported that they did not allow hedging of unvested
equity.
8.78 Some participants, including the Financial Sector Union and
ACSI, considered that hedging of unvested equity should be prohibited in
the Corporations Act.
8.79 The Australian Institute of Company Directors (AICD) warned
that black letter law might not prove effective given the complexities of
hedging arrangements, and the difficulties in legislating for all possible
vesting conditions and trading limitations.
8.80 CSA and Macquarie Group contented that executives should be
permitted to hedge vested remuneration. CGI Glass Lewis and Guerdon
Associates considered it reasonable to allow hedging of vested equity
without holding locks.
8.81 The PC found that conflicts of interest in the voting system can
arise where a person who may gain a material personal benefit from a
resolution can influence the result of the resolution, either by voting their
own shares or acting as a proxy holder.
8.82 Numerous submissions to the PC, including CSA and
Riskmetrics, raised the conflict of interest present when those names in
the remuneration report also vote on the report. Macquarie Group,
BHP Billiton and the AICD felt that excluding executives would have
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little impact on the vote. The ASX supported the prohibition of KMP
from voting when there is a direct conflict of interest.
8.83 Some organisations, for example, Origin and Guerdon
Associates, have argued against excluding undirected proxies, on the basis
that such a reform may disenfranchise retail shareholders.
Conclusion and recommended option
8.84 Option A is not considered ideal, as it permits directors and
executives to hedge their incentive remuneration which `de-links'
remuneration from performance.
8.85 Option B is the preferred option. This proposal will strengthen
the remuneration framework by ensuring that the interests of management
are aligned with the interests of shareholders, and that remuneration is
genuinely linked to company performance.
`Cherry-picking' Votes
Problem
8.86 Shareholders that are not able to attend a company meeting but
still wish to vote can do so by proxy. Shareholders can provide directed
proxies (which specify how they wish to vote on a resolution) or
undirected proxies (which enable the proxy holder to choose how to vote).
The current law requires all directed proxies held by the Chair to be voted,
however, non-Chair proxy holders can choose which proxies to vote. This
enables non-Chairs to not exercise votes that do not accord with their own
views on a resolution, and to exercise only the votes that do support their
position. This is called cherry-picking.
8.87 The practice of cherry-picking impairs the transparency and
effectiveness of shareholder voting. In essence, it enables the wishes of
shareholders to be ignored and can result in outcomes that do not clearly
reflect shareholder views on a resolution.
8.88 This practice also facilitates the intrusion of conflicts of interests
of non-Chair proxy holders into the voting process. This is because it
allows proxy holders, who are otherwise prohibited from voting their own
shares on a resolution due to a conflict of interest, to influence the
decision on a resolution through cherry-picking. This can mute a
shareholder signal that would otherwise become apparent through the
outcome on a resolution. This is especially problematic in relation to the
non-binding remuneration vote.
8.89 In an environment where direct voting is not commonly used,
cherry-picking is a particular problem. Shareholders who issue directed
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Regulation impact statement
proxies would probably be surprised to learn that their votes may not be
exercised in the manner they intend.
Evidence
8.90 There was little input received in submissions to the PC report
on removing cherry-picking. However, in 2008 the Parliamentary Joint
Committee on Corporations and Financial Services (the PJC) conducted
an inquiry into shareholder engagement and participation. Its report,
Better shareholders, better companies, included a recommendation that
the Corporations Act 2001 be amended to remove cherry-picking.
Forty five submissions were received to the inquiry and the committee
also conducted public hearings.
8.91 In the submissions received during the course of the inquiry,
CSA indicated that there is a lack of transparency in the current proxy
voting system and it does not provide shareholders with a guarantee that
their voting intention will be reflected. The AICD also noted that there
should be a mechanism to reflect the views of all shareholders.
Objectives of Government action
8.92 The objectives of Government action in relation to
cherry-picking are to:
· increase the transparency of the voting system;
· increase the effectiveness of shareholder voting to prevent
shareholders becoming disenfranchised;
· enable shareholder views to be accurately reflected,
especially in relation to the non-binding remuneration report
vote; and
· prevent conflicts of interest influencing the voting process in
a manner that is contrary to shareholder wishes.
Options to achieve objectives
Option A: No change
8.93 Under this option, non-Chair proxy holders would continue to be
able to cherry-pick votes from the directed proxies they hold.
Option B: Require non-Chair proxy holders to exercise all directed
proxies if they choose to exercise one vote
8.94 Under this option, non-Chair proxy holders could choose not to
vote any directed proxies, however, if they choose to vote one they must
vote them all. Consequently, a proxy holder could still influence the
outcome of a vote by not casting votes if the majority of proxies do not
support their view on a resolution.
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Option C: Require non-Chair proxy holders to exercise all directed
proxies or have them automatically default to the Chair, who has a duty
to vote them
8.95 Under this option, non-Chair proxy holders would be required to
vote as directed when they vote on a poll.
8.96 However, in the case that on a poll vote a proxy holder does not
register at a meeting or does not vote the directed proxies, all directed
proxies will automatically to default to the Chair, who has a duty to vote
directed proxies.
Impact analysis
Option A: no change
Shareholders
8.97 There would be no change for consumers (shareholders) under
this option. Cherry-picking would still be allowed to occur, meaning that
the views of shareholders would potentially not be reflected in the voting
on a resolution.
Companies
8.98 There would be no change for companies under this option.
Proxy holders would still be able to cherry-pick votes to influence the
outcome of a voting process in accordance with their wishes. Director or
executive proxy holders could still cherry-pick proxies despite the fact
they might be prevented from exercising their own votes on a resolution
due to the existence of a conflict of interest.
Government
8.99 There would be no change for the Government under this option.
Option B: Require non-Chair proxy holders to exercise all directed
proxies if they choose to exercise one vote
Shareholders
8.100 This option would be unlikely to result in any real improvement
for shareholders. Proxy holders would only be likely to exercise all
directed proxies if the majority align with their view on a resolution. As
such, conflicts of interest would still be able to influence shareholder
votes, meaning that the signal on a resolution would not be accurate.
Companies
8.101 This option is unlikely to result in any practical change for
business. If a non-Chair proxy sought to influence the voting process,
they would simply assess whether the majority of directed proxies align
with their view on a resolution, and then choose whether to vote all the
directed proxies accordingly.
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Regulation impact statement
Government
8.102 This option is likely to result in costs for the Government
associated with monitoring compliance and taking any necessary
enforcement action.
Option C: require non-Chair proxy holders to vote all directed proxies
or have them automatically default to the Chair
Shareholders
8.103 This option would result in an improvement for shareholders.
Preventing cherry-picking would ensure that outcomes on resolutions
more clearly reflect the views of shareholders. It would increase the
transparency of the voting process and the ability of shareholders to
participate in the running of their company. It would also ensure that
shareholder signals on remuneration votes are accurate.
8.104 This option could also produce flow-on effects such as greater
information flow to shareholders about resolutions on which they can
vote.
Companies
8.105 This option would limit the potential for proxy holders to bring
personal conflicts of interest to bear on the voting process. As such,
companies may choose to provide more information to shareholders about
the resolutions they are able to vote on in order to ensure their voting is
well informed. It would also increase the impact of the two-strikes
proposal to promote greater accountability.
8.106 This option will impact on the way in which companies manage
their voting systems, however, each company has the ability to vary the
operation of their default system to best suit their circumstances.
Government
8.107 This option could involve costs for the Government, through the
monitoring of compliance and the potential need for enforcement action.
Consultation
8.108 Cherry-picking of directed proxies is an issue that has received
attention from both the PC and PJC. The PC's inquiry received
170 submissions and the PJC received 45 submissions, and both also
conducted public hearings.
8.109 This recommendation is generally not considered to be
controversial, which is reinforced by the fact that it did not receive a great
deal of commentary in submissions. However, in general, submissions
supported the removal of cherry-picking on the basis that shareholder
views on a resolution should be accurately reflected and that there should
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be efficacious voting mechanisms for shareholders that cannot attend a
meeting.
8.110 Support for removing cherry-picking was given by the
Australian Bankers Association, Mercer, Hay Group, Perpetual, the
Financial Sector Union of Australia, the Australian Shareholders
Association, Macquarie, Mr Andrew Murray, and Regnan, among others.
This support was primarily provided on the basis that shareholders are
entitled to expect that their shares will be voted as they direct.
Conclusion and recommended option
Recommended option: Option C
8.111 It is important to ensure that company voting systems are
effective in enabling shareholders to vote on a resolution without having
to attend a meeting. Voting systems should be transparent and clearly
reflect the views of those that own the company and should ensure that
shareholder signals on a resolution are not muted. Voting systems should
not enable the views of those that are otherwise prohibited from voting
due to a conflict of interest to influence a final decision if this is contrary
to the wishes of shareholders.
8.112 The only option that achieves these outcomes is Option C. It
will increase the transparency and effectiveness of shareholder voting, and
provide better signals to the company on remuneration reports. As such, it
will couple well with the two-strikes proposal making it more likely that
boards will be held accountable.
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Regulation impact statement
Coverage of Management Personnel
Problem
8.113 Under section 300A of the Corporations Act 2001 (the
Corporations Act), all listed companies, including financial institutions,
are required to prepare a comprehensive remuneration report which
accompanies the Annual Director's report.
8.114 The Corporate Law Economic Reform Program (Audit Reform
and Corporate Disclosure) Act 2004 (CLERP 9) introduced the
requirement for listed companies to disclose the remuneration of directors
and senior management in relation to both the listed company and
consolidated entity. This means that the remuneration of the five most
highly remunerated executives, as well as the KMP of both the parent and
consolidated entity must be disclosed.
8.115 As the PC noted in its report, the contemporary usefulness of
this requirement is questionable as it was introduced when there was no
coherent interaction between the Corporations Act and the Australian
Accounting Standards.
8.116 Currently, the practical problem with this requirement is that for
large companies, the five highest paid group and company executives are
also likely to be KMP. In contrast, small companies may have fewer than
five KMP. This makes the disclosure requirements quite onerous to
apply.
8.117 Also, the requirement to include disclosures from both the
parent and consolidated entities means that a lot of the time the
remuneration report has an overlap of information.
8.118 Many participants in the PC's consultations signalled little
interest in remuneration details beyond the CEO.
Objective of Government action
8.119 The objective of Government action is to address the problem
identified above by:
· ensuring that the regulatory machinery in regards to
remuneration reports is contemporary and straightforward for
users.
Options to achieve objective
Option A: No change
8.120 Under this option, the status quo would be maintained. The
Corporations Act requires that all listed companies disclose the
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remuneration of the five most highly remunerated executives, as well as
the KMP of both the parent and consolidated entity in the annual
remuneration report.
Option B: Individual remuneration disclosures in the annual
remuneration report are confined to the key management personnel of
the consolidated entity.
8.121 Under this option, the Corporations Act will be amended to
require that all listed companies disclose the remuneration of the KMP of
the consolidated entity in the annual remuneration report.
Impact Analysis
Impact group identification
8.122 Affected groups:
· shareholders and other parties with an interest in the
company (for example creditors and employees);
· companies (including company directors and executives);
and
· Government and regulators.
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Regulation impact statement
Assessment of costs and benefits
Table 8.12 Option A: Do nothing
Benefits Costs
Shareholders and other Shareholders are able Maintains the
parties with an interest to view the overlapping of
in the company (for remuneration details of remuneration
example creditors and the KMP and the top information, which
employees) five executives in both makes the remuneration
the parent and report bulky and
consolidated entity. complex for the
shareholder to view and
understand.
Companies (including Disclosure of this
company directors and information is costly to
executives) companies.
Additionally, it has the
potential to require
companies to disclose the
remuneration
information of
employees who do not
affect the management of
the company.
Government/regulators Currently, the regulator
has to ensure that the
company complies with
the disclosure
requirements.
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Table 8.13 Option B: Require disclosure of the remuneration of
the key management personnel of the consolidated entity
Benefits Costs
Shareholders and other While this option requires Potential to
parties with an interest in fewer disclosures, it decrease
the company (for ensures that the transparency, as
example creditors and remuneration information this option requires
employees) disclosed meets fewer disclosures.
shareholders needs. They However, it is
will be able to easily view unlikely that the
the remuneration of the remuneration of
KMP in the parent entity individuals who
without having to sift affect the
through overlapping management of the
information as in the status company will not
quo. be disclosed.
Companies (including Under this option, meeting
company directors and the remuneration
executives) disclosure requirements
will be less costly and
complex for companies to
disclose. Additionally,
irrelevant or overlapping
information will not have
to be disclosed.
Government/regulators The regulator will not have
to ensure that all the
relevant personnel are.
Government/regulators captured in the
(continued) remuneration disclosures,
as under the status quo.
Rather, it will only have to
ensure that the KMP of the
parent entity is disclosed.
Consultation
Shareholders
8.123 The Australian Shareholders Association (ASA) contended that
the disclosure of remuneration of the top five most highly remunerated
executives, as well as the KMP of both the parent and consolidated entity
is of interest to shareholders. The ASA sees the definition of KMP too
narrow as a company may have an individual that may fall into the
category of key personnel without being part of management, and be the
highest paid individual within the company.
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Regulation impact statement
8.124 In contrast, the Australian Council of Super Investors (ACSI)
recognised the arguments for rationalising references to the five highest
paid executives in company reports to `key management personnel' in
accordance with Australian Accounting Standards Board (AASB)
standard 124 (being individuals who may be able to influence their own
pay or materially affect the management of the company).
Companies
8.125 Submissions received by the PC, including submissions from
BHP Billiton, the Joint Accounting Bodies, CGI Glass Lewis and
Guerdon Associates questioned the need for inclusion of the five highest
paid group and company executives as well as the KMP in the
remuneration report. BHP Billiton suggested that the Corporations Act be
aligned with the Australian Accounting Standards.
8.126 The Institute of Chartered Accountants supports the removal of
the top five executive disclosures in order to focus disclosure of detailed
information on individual `KMP' as defined by AASB standard 124.
8.127 The AICD supports amending the requirements to Option B on
the basis that it will help reduce complexity and cost associated with
report preparation, as well as help with the readability of reports.
8.128 KPMG submitted that shareholders were not interested in
remuneration disclosure beyond the individual directors and the CEO.
Conclusion and recommended option
8.129 The remuneration report should focus on the individuals who
may be able to influence their own pay or materially affect the
management of the company. Accordingly, it is recommended that the
Corporations Act should be amended to reflect that individual
remuneration disclosures be confined to KMP of the consolidated entity.
The additional requirement for the disclosure of the top five executives of
the parent entity should be removed.
8.130 On balance, the minor technical amendment to the regulatory
framework will be to the benefit of both shareholders and companies.
8.131 This amendment will reduce regulatory burden and simplify the
complexity of disclosures in the remuneration report, while maintaining
corporate accountability.
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Remuneration consultants
Problem
8.132 Remuneration consultants provide advice to companies on
matters relating to remuneration arrangements, pay structures and
performance hurdles, including strategic advice on how the levels of
remuneration are benchmarked against industry standards. Some
stakeholders have expressed concerns about companies engaging
remuneration consultants to provide advice on director and executive
remuneration.
8.133 Currently, an information asymmetry exists, as there are no
mandatory disclosure requirements relating to the use of remuneration
consultants. However, this information is necessary to ensure that
shareholders and other users are aware of the role remuneration
consultants have played in influencing the company's remuneration
arrangements, and to ensure that users are able to assess the independence
of the remuneration consultant's advice.
8.134 A key concern raised by stakeholders is that remuneration
consultants may be placed in a position of conflict if they are asked to
provide advice on the remuneration of officers who might have the
capacity to affect whether or not that consultant's services will be retained
again (either for remuneration advice or other services the consultant may
provide to the company). For example, a remuneration consultant may
feel that remuneration advice that is unfavourable to the company
executives may compromise access to future work. In addition, concerns
have been raised that the use of remuneration consultants can `ratchet up'
remuneration levels.
8.135 As noted by the PC, it is common for boards to seek external
advice on remuneration matters. Boards, especially from larger
companies, generally seek information from a range of consultants when
determining remuneration packages. According to a survey by a
corporate governance advisor, 67 percent of boards seek independent
advice on CEO remuneration. Another survey indicated that 83 per cent
of boards seek independent advice when negotiating contracts with CEOs.
8.136 It is noted that, while the advice of remuneration consultants
may be influential in determining a company's remuneration decisions,
the primary responsibility for remuneration arrangements rests with
company directors.
Objectives of Government action
8.137 The objectives of Government action are to address the
problems identified above by:
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Regulation impact statement
· increasing the transparency of the remuneration setting
process by addressing the current information asymmetry;
· enabling shareholders to make an informed assessment about
the independence of the remuneration consultant's advice;
and
· minimising potential conflicts of interests in the
remuneration setting process.
Options to achieve objectives
Option A: No change
8.138 Under this option, the status quo would be maintained by not
requiring any disclosure on the use of remuneration consultants.
Option B: Require listed companies to disclose the use of remuneration
consultants and require any remuneration consultants used by the
company to be engaged by, and report to, the board of directors or the
remuneration committee
8.139 Under this option, companies that are a disclosing entity would
be required to disclose details relating to the use of remuneration
consultants such as the remuneration consultant used, a statement that the
consultant made a remuneration recommendation, a statement if the
consultant provided any other kind of advice to the company or entity for
the financial year, the amount and nature of the consideration payable to
the consultant for the remuneration recommendation and any other advice
provided to the company, and information about the arrangements made
to ensure that the consultant's recommendation was free from undue
influence from the KMP.
8.140 In addition, boards will be required to approve the remuneration
consultants, and the remuneration consultant must report to the
non-executive directors or the remuneration committee rather than
company executives (unless the board consists only of executive directors
or the company does not have a remuneration committee), to minimise
potential conflicts of interests.
Impact analysis
Impact group identification
8.141 Affected groups:
· shareholders and other parties with an interest in the
company (for example creditors and employees);
· companies (including company directors and executives);
and
· Government and regulators.
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Assessment of costs and benefits
Table 8.14 Option A: Do nothing
Benefits Costs
Shareholders and other Shareholders will not be
parties with an interest in in a position to make an
the company (for informed assessment
example creditors and about the independence
employees) of the remuneration
consultant's advice, and
remuneration
consultants will
continue to be placed in
a position of conflict
which may impact on
the integrity of their
advice and ultimately,
the remuneration levels
of company executives.
Companies (including Listed companies will
company directors and not be required to
executives) provide additional
disclosures in the
remuneration report.
Government/regulators
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Regulation impact statement
Table 8.15 Option B: Require listed companies to disclose the use
of remuneration consultants and require any remuneration
consultants used by the company to be engaged by, and report to, the
board of directors or the remuneration committee
Benefits Costs
Shareholders and other Greater transparency for
parties with an interest in shareholders, as they will
the company (for example be in a better position to
creditors and employees) assess potential conflicts
of interests. It will also
facilitate greater
independence of
remuneration consultants
by ensuring that their
advice is provided to the
board rather than the
company executives. In
addition, greater
transparency on the role
of remuneration
consultants could
potentially lead to better
accountability of
company management
and better remuneration
policies.
Companies (including Listed companies
company directors and will be required to
executives) provide additional
disclosures in the
remuneration
report.
Government/regulators
Consultation
8.142 The PC consulted extensively on this issue and found that
although companies are not required to disclose their use of remuneration
consultants, some choose to do so, for example, BHP Billiton, Iluka
Resources and Woodside Petroleum.
8.143 Submissions made to the PC by Mercer reported that the lines of
reporting for remuneration consultants can easily be blurred. The PC
found that in Australia, companies and remuneration consultants are
mindful of the potential for conflicts of interest. The top two companies
providing remuneration advice to boards in Australia also provide advice
to management on remuneration, and to both the board and management
on other areas more broadly.
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8.144 Suggested changes to the process of engaging remuneration
consultants included introducing a requirement:
· that remuneration consultants be engaged directly by the
board (Fidelity International, KPMG, Oppeus);
· that remuneration consultants advise only the board or
management, but not both (CGI Glass Lewis and Guerdon
Associates); and
· for boards to have clearly defined and disclosed systems and
procedures to address any potential conflicts of interest
(Guerdon Associates, KPMG, PricewaterhouseCoopers,
Regnan).
8.145 Overwhelmingly, it was found that increasing disclosure on the
use of remuneration consultants would help shareholders identify the
extent to which the consultants provide advice to the board or
remuneration committee, and assess whether the remuneration decisions
that boards and remuneration committees make are based on
`independent' advice. This was supported by Riskmetrics, ACSI,
CGI Glass Lewis, Guerdon Associates, and the AICD.
Conclusion and recommended option
8.146 Option A is not considered ideal, as it does not address the
current information asymmetry that exists in the current framework. As a
result, the remuneration setting process will not be transparent,
shareholders will not be in a position to make an informed assessment
about the independence of the remuneration consultant's advice, and
remuneration consultants will continue to be placed in a position of
conflict which may impact on the integrity of their advice and ultimately,
the remuneration levels of company executives.
8.147 Option B is the preferred option. This option will deliver greater
transparency for shareholders, as they will be in a better position to assess
potential conflicts of interests. It will also facilitate greater independence
of remuneration consultants by ensuring that their advice is provided to
the board rather than the company executives. It will also bring Australia
into line with other key jurisdictions which require disclosure of the use of
remuneration consultants.
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Regulation impact statement
Consultation
8.148 The PC has conducted extensive consultation in the preparation
of this report which commenced in March 2009, including informal
consultations, roundtables and public hearings. An issues paper was
released in early April 2009 and a Discussion Draft was released on
30 September 2009. The PC received 170 submissions, 105 prior to the
release of the Discussion Draft and a further 65 in response to the
Discussion Draft.
8.149 The public consultation process undertaken in relation to the
inquiry included a range of stakeholders comprised of industry group
representatives, professional bodies and consultants, among others. Key
stakeholders that were consulted as a part of this process included:
· the Australian Institute of Company Directors;
· Australian Shareholders' Association;
· BHP Billiton;
· Macquarie Group;
· Regnan;
· Mercer;
· RiskMetrics;
· Freehills;
· the Australian Council of Trade Unions;
· academic researchers;
· Australian Council of Super Investors;
· the professional accounting bodies;
· Australian Prudential Regulation Authority; and
· the Treasury.
8.150 The PC has also conducted public hearings which were held in
Sydney, Melbourne and Brisbane in June and July to discuss the report
prior to the release of the Discussion Draft. A second round of public
hearings was held from October to November.
8.151 The PC report addresses the issues raised by stakeholders in the
extensive consultation process. Stakeholder views were considered in
order to further understand how the proposed reforms would impact on a
number of related areas of corporate governance. In addition, the PC
found that consultation was valuable in understanding the need for
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awareness of the potential for unforeseen consequences and to ensure
proportionality among companies of widely differing sizes.
8.152 Treasury's consideration of the policy issues was informed by
the Productivity Commission's report and consultation process. Treasury
did not directly consult with stakeholders.
Implementation and review
8.153 The preferred options identified above will be progressed
through amendments to the Corporations Act 2001.
8.154 These amendments to give effect to the Act are being
implemented through the Corporations Amendment (Improving
Accountability on Director and Executive Remuneration) Bill 2011.
Following consultation on the exposure draft Bill, further amendments
have been made to the draft Bill to improve the operation of the Bill's
requirements. These further amendments have been considered in the
preparation of this RIS. The Australian Securities and Investments
Commission is the corporate regulator responsible for enforcing all parts
of the Corporations Act, including any changes implemented through
amendments in the Act.
8.155 If the ASX decides not to amend the Listing Rules in line with
the relevant PC recommendations, the Government may opt to amend the
legislation further. Any changes would be reflected in a revised
Regulatory Impact Statement.
8.156 In addition, the PC has recommended a post-implementation
review within five years to evaluate the outcomes of the Government's
response. This is to ensure that there are no unintended consequences.
The Government accepts this recommendation and will instruct Treasury
to conduct the post-implementation review.
78
Index
Schedule 1: Amendments
Bill reference Paragraph number
Item 4, section 9 2.10
Item 6, section 9B 2.15
Item 8, subsection 206J(1) 4.6
Item 8, subsection 206J(3) 4.7
Item 8, subsections 206J(4), (5) and (6) 4.9
Item 8, subsection 206J(7) 4.10
Item 8, subsection 206J(8) 4.8
Item 8, subsection 206K(1) 2.9
Item 8, subsection 206K(2) 2.9
Item 8, subsection 206K(3) 2.11
Item 8, subsections 206K(4) and (5) 2.12
Item 8, subsections 206L(2) and (3) 2.13
Item 8, subsection 206L(5) 2.16
Item 8, subsection 206L(6) 2.17
Item 8, subsection 206M(2) 2.18
Item 8, subsection 206M(3) 2.19
Item 9, subsection 249L(2) 1.13
Item 10, subsection 250BD(1) 3.11
Item 10, subsection 250BD(2) 3.12
Item 10, subsection 250BD(3) 3.13
Item 10, subsection 250BD(4) 3.14
Item 12, subsection 250R(4) 3.7
Item 12, subsection 250R(5) 3.8
Item 12, subsection 250R(6) 3.9
Item 12, subsection 250R(8) 3.10
Item 13, section 250V 1.13
Item 13, subsection 250V(1) 1.15
Item 13, subsection 250V(2) 3.7
Item 13, section 250W 1.13
79
Corporations Amendment (Improving Accountability on Director and Executive Remuneration)
Bill 2011
Item 13, subsections 250W(2) and (3) 1.17
Item 13, subsections 250W(4) and (9) 1.15
Item 13, subsection 250W(5) 1.18
Item 13, subsection 250W(5) and (8) 1.19
Item 13, subsection 250W(6) 1.20
Item 13, section 250X 1.21
Item 13, section 250Y 1.22
Item 14, paragraph 300A(1)(a) 7.6
Items 15 and 16, paragraph 300A(1)(c) 7.7
Item 19, paragraph 300A(1)(g) 1.13
Item 19, paragraph 300A(1)(h) 2.20
Item 30, section 201P 5.6
Item 30, subsections 201P(3) and (4) 5.9
Item 30, section 201S, paragraph 201P(1)(c), section 201Q 5.7
Item 30, section 201U 5.10, 5.11
Item 30, subsections 201U(5) and (6) 5.12
Item 33 6.7
Item 34, paragraph 250BB(1)(c) 6.8
Item 34, paragraph 250BB(1)(d) and subsections 250BB(3) and (4) 6.9
Item 34, section 250BC 6.10
80
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